Redemption Rights - Preferred Shares

What are redemption rights? And more specifically, what are redemption rights with regard to preferred ownership interest or preferred equity held by an investor in a startup venture

Well, redemption rights generally refer to rights to force the company to repurchase the ownership interest held by a shareholder

So if a holder of preferred shares, which is often the case of an investor in a startup business, the investor that holds redemption rights can force the company to repurchase the equity interest purchased by that investor at the time of investment

Now, the objective of this is to make certain that the investor does not get caught in an otherwise failing or floundering business

The investor, whenever he or she deems necessary, again can force the company to repurchase the shares

Oftentimes, there is a mandatory redemption right in the equity interest, which actually forces the company to repurchase the ownership interest at a specific time or prior to a specific time in the future

So once again, it sets a hard date that the company has to come up with the funds necessary to cash out the investor

So either of these provisions are common with regard to preferred shares received by investors in startup ventures