Redemption rights are common in term sheets from sophisticated investors. They let investors sell back their shares to the company at the purchase price in the future, usually if the company is failing or is going "sideways" - i.e., not headed for a huge exit, but making enough money to stay afloat.

Founders should be cautious of redemption rights, which can cause huge headaches for struggling companies. Imagine the investors pulling out a large chunk of the company's cash before it gets enough traction to grow. Redemption also sends terrible signals to future investors. Who would buy into a company when the original investors - i.e., the people who believed in the company enough to take the biggest risk - are running for the life rafts?

Most investors will insist on some redemption rights, so it's up to the founders to negotiate for reasonable restrictions: Always set a period of time before investors can exercise the redemption rights, the longer the better. And, insist on getting a payment schedule for redemption to prevent the investors from pulling all of their money out at once. Payment in three annual installments is common.