Wed, 22 December 2021
Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
In an early-exit term sheet, the investors have the right to redeem their stake in the company before an acquisition.
There are several redemption exercise strategies.
The first strategy is to recover the principal investment.
This makes the investor whole and now lets them play with "house money".
The second strategy is to place a third of the shares into a cash redemption to recover the initial investment, a third into the company as an equity stake, and a third as a cash redemption to place into the next startup.
This keeps the investors’ fund evergreen, supports the current company, and expands the portfolio.
The third strategy is to take half in debt and leave the other half for equity.
This evenly divides the funds into both sides of the investment options.
These are the most common strategies investors use to redeem their stake in an early exit term sheet.
It’s important to take into consideration the needs of the startup and how best to support them.
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