Redemption Rights

Venture funds are focuesd on exit strategies. The successful investment will exit with either a merger/sale or an IPO. When firms are unable to achieve a traditional exit, venture funds are left with illiquid positions. Given the time-limited nature of most venture funds, having an illiquid investment with no reasonable prospect of an exit is less than ideal. To mitigate that risk, investors will often negotiate redemption rights. The redemption right is a requirement that in the absence of a liquidation event like an IPO or merger, that the investor will have the right to call on the board to redeem the investor's stock at an agreed upon price. If nothing else, the redemption right gives investors some degree of downside protection in a failed investment. 

It is important to remember that the interests of the board/corporation and the investors do not always align. An investor seeking to redeem a redemption right in a failed investment is just one such time when interests are misaligned.