The Investor Wanted a Redemption Right the Board Could Not Give Away

The situation

Alfred called us on a Tuesday afternoon, a term sheet open in front of him that he said he had read three times and still did not trust himself to sign. He chaired the board of a not-for-profit whose main asset was a logistics subsidiary based in Marathon, a trucking and freight operation generating revenue somewhere in the tens of millions annually, with the not-for-profit's mission-related activities funded largely out of the subsidiary's earnings. An outside investor wanted in, offering meaningful growth capital in exchange for a new class of preferred shares in the subsidiary, and the deal, on its face, looked like exactly what the board had been hoping for.

Alfred had relevant experience of his own. He owned a logistics company outright, a separate business from the subsidiary, and he understood freight operations and growth capital better than most people who sit on not-for-profit boards. That was part of why the other directors had leaned on him to lead the file. The investor's representative, Naomi, had brought her own investment advisor, Sakura, into the negotiations early, and the term sheet they had produced together used language Alfred recognized from his own dealings, standard, professional, and, he suspected, written with assumptions that did not quite fit an organization whose ultimate owner was a not-for-profit board rather than a founder looking to cash out.

The subsidiary needed the capital. New trucks, a warehouse expansion, and a technology upgrade to routing and dispatch had all been delayed for two years for lack of funding, and the board's own reserves could not cover it without capital from somewhere. Turning the investment down was not a comfortable option. But Alfred's instinct, sitting with that term sheet, was that something in it did not fit the structure underneath it, and that instinct was the reason he called before signing rather than after.

The board had spent nearly a year courting this particular investment. Two earlier prospects had walked away after due diligence, unconvinced that a not-for-profit-controlled subsidiary could offer the kind of return path a growth investor typically expects, and Naomi's group was the first to come back with a serious term sheet rather than a polite decline. That history put real pressure on the board to say yes quickly, and Alfred was conscious that raising concerns now risked looking like the organization was, once again, going to be the reason a promising deal fell through.

Still, Alfred had sat on enough deals of his own to know that pressure to close quickly is exactly when the details that matter most get waved through unread. He told the board he wanted a second set of eyes on the term sheet before anyone signed anything, and that was the call that reached us.

What the other side was relying on

The term sheet proposed a new preferred share class for Naomi's investment, carrying a fixed dividend, priority on any wind-up, and, buried in a schedule near the back, a redemption right allowing the holder to require the subsidiary to buy back the shares for cash after a set number of years, at the investor's option. That last feature is common enough in ordinary venture and private equity deals, where a redemption right gives an investor an exit path if the company never gets sold or never generates the returns hoped for. Sakura's draft treated it as a standard term, something any growth investor would reasonably expect, and nothing in the document flagged it as unusual.

What Sakura's side appeared not to have accounted for was where the subsidiary's cash actually came from and where it needed to keep going. A redemption right that could be exercised on demand assumes the company can raise or set aside cash to fund the buyback when the date arrives, typically through a further financing round, a sale, or retained earnings built up for the purpose. In an ordinary for-profit company answering to founders and other investors focused on return, that assumption is reasonable. Here, the subsidiary's earnings were the not-for-profit's main funding source for its mission activities. A redemption obligation landing in a future year could force the subsidiary to divert cash away from that funding, or to seek emergency financing, at exactly the moment the board would have the least ability to negotiate good terms, precisely because the money would be owed rather than optional.

The deeper issue was governance, not just cash flow. A not-for-profit board's directors owe duties tied to the organization's purposes, and a structure that could, years down the road, force the subsidiary to prioritize a redemption payment over the funding relationship the not-for-profit depended on sat uneasily against those duties. Sakura and Naomi were not acting in bad faith. Their draft simply reflected the market standard for this kind of instrument, built for a different kind of owner, and nobody on their side had reason to know that standard did not transfer cleanly onto a not-for-profit-controlled structure until someone on our side said so.

There was a timing detail buried in the schedule that made the mismatch sharper still. The redemption window opened several years out, which was clearly meant to give the subsidiary time to grow into a position where a buyback would be affordable. But growth in a capital-intensive freight business tends to consume cash rather than free it up, new equipment, larger facilities, more working capital tied up in fuel and payroll, so the years that were supposed to make redemption easier were, if anything, likely to make it harder. Sakura's model appeared to assume steady profit accumulation with nothing competing for it, an assumption that did not match how this particular subsidiary actually spent its earnings.

What we did

1. Reviewed the subsidiary's cash position against the redemption timeline. We modeled what the subsidiary's finances would plausibly look like at the point the redemption right could first be exercised, and confirmed that a demand for repayment at that stage could realistically force a diversion of funds away from the not-for-profit's core activities, turning a theoretical risk into a concrete one worth negotiating over.
2. Explained the governance angle directly to Alfred and the board. We set out why a redemption right of this kind sat differently against a not-for-profit-controlled subsidiary than it would against an ordinary private company, walking through how a future cash demand could pull against the board's own duties to the organization's mission. That explanation made sure the full board understood this was not simply Alfred's discomfort with unfamiliar paperwork but a structural mismatch worth raising formally with the investor's side.
3. Proposed the practical fix before drafting anything. Rather than starting with legal language, we worked with Alfred to find a business solution both sides could accept: a dividend-only preferred class, with a healthy fixed return and priority on wind-up, but no right to force a cash redemption, paired with a right of first offer if the subsidiary was ever sold outright, giving Naomi a real path to return without a demand feature that could destabilize the mission funding.
4. Took the practical fix to Sakura and Naomi as a counter-proposal. We framed the change as protecting the deal's long-term viability rather than as a rejection of their terms, explaining that a redemption right the subsidiary might struggle to honour years later was a risk to their return as much as to the not-for-profit, since a forced default would help nobody.
5. Drafted the share provisions to lock the fix in precisely. Once the business terms were agreed, we wrote the articles of amendment creating the new class with the dividend and wind-up priority intact and no redemption mechanism at all, and we checked every cross-reference in the schedule to make sure no residual buyback language survived from Sakura's earlier draft. That closed the door on the right being reintroduced later through ambiguous drafting or a future amendment nobody scrutinized as closely.
6. Added board-approval protections around future share classes. To prevent a similar gap from opening in a later financing round, we built in a requirement that any future preferred class needed specific board approval identifying its key terms, dividend rate, redemption features if any, and priority, rather than a general delegation that could let a future redemption right slip through unnoticed the way this one nearly had.
7. Confirmed the corporate law formalities for the new class. We prepared and filed the articles of amendment under the Ontario Business Corporations Act, updated the subsidiary's share register and minute book, and confirmed the not-for-profit's own governing documents permitted a subsidiary structure of this kind before the investment closed, so the deal could not later be challenged on a technical governance ground neither side had thought to check.

The outcome

Naomi's investment closed roughly three months after Alfred's original phone call, on the dividend-only preferred structure rather than the redemption-backed one first proposed. The capital funded the trucks, the warehouse expansion, and the dispatch technology the subsidiary had been waiting on for two years, and the not-for-profit's funding relationship with the subsidiary was never put at risk, because the obligation that could have threatened it was never created in the first place.

Sakura, once the cash-flow modeling was laid out plainly, did not push hard to keep the redemption right. Her read, which Alfred later heard secondhand, was that a client whose promised return depended on a subsidiary that could be forced into a cash crunch was not actually a stronger deal for Naomi either, and the right of first offer on a future sale gave her client a comparable upside without that risk.

Because nothing went wrong here, in the sense that no redemption ever came due and no cash crisis ever forced a hard choice between the investor and the mission, the value of the work is easy to understate in hindsight. Alfred did not describe it that way. He said the moment that mattered was catching the mismatch in a term sheet before anyone had signed it, since undoing a granted redemption right years into an investment relationship would have been a far harder and more expensive conversation than declining to grant it in the first place.

The board approval requirement built into the amendment turned out to matter sooner than anyone expected. Eighteen months later, when the subsidiary considered a second, smaller round from a different investor, that requirement forced the same cash-flow question onto the table early, before a term sheet had gone anywhere near signature, rather than after. Alfred said that was the real measure of whether the first fix had worked: not that one bad term had been avoided once, but that the structure now caught the next one on its own, without needing a board chair's private unease to flag it.

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