Structure hides weakness before price

The most commonly followed terms in term sheets are the numbers cited in public: the amount invested and the pre-money valuation. But the structural elements not cited in public - participation rights, liquidation preferences, dividends, and more - can have a big impact on returns for investors. Cooley's Q1 2026 Venture Financing Report showed redemption rights going from 1.8% of deals to 6.1% in a single quarter, almost quadrupling, while liquidation preference stayed about as founder-friendly as it's been (98.2% still at a plain 1x), a structural element that deserves a second look.

A redemption right gives the preferred holder the option, usually starting five or six or seven years after the round, to force the company to buy back their shares at the original price, sometimes with an accrued return stacked on top. It isn't a liquidation preference, which impacts how proceeds are distributed at an exit: redemption is a put option for the investor that can be exercised while the company is still operating, no sale or acquirer required. The investor just has to decide they want their money back, and the document says they can ask for it.

Let's talk about numbers. Say founders start with 8 mm shares and raise a Series A: $4 mm raised on a $16 mm pre-money valuation. That Series A investor ends up owning 20% of the company. If the company has not exited, at the redemption window the investor who put in $4 mm has a right to put those shares back to the company at cost, or more if the redemption rights specify a return on their investment. If the business is doing fine but hasn't had an exit, and there's no new round lined up to buy them out, the company has to come up with $4 mm in cash to redeem a 20% holder. In practice the right rarely gets exercised exactly the way the document describes, because a company that can't pay usually ends up negotiating, but the threat of it is leverage on its own, and it reorders who has the upper hand in every conversation that happens inside that window.

I'm genuinely unsure how durable this uptick is, since it's one quarter of data and the sample for any single structural term is small to begin with. Terms drift over time based on the fundraising market at that time. A rough market tends to show up in structure before it shows up in price, because founders often want to protect the headline valuation number and it's easier to give up greater downside protections or upside sweeteners to investors. But if redemption rights are going to be in the agreement, model the redemption window, the price, any accruing return, and put it against your own forecast of where cash sits in year five or six. It's worth knowing the potential implications before agreeing to the deal.