Healthcare Founder Toolkit
A founder who has signed multiple term sheets explains what drag-along rights, tag-along rights, liquidation preferences, and redemption rights actually mean — and what to watch out for before you sign. |
The exit clauses? Skimmed. My lawyer mentioned them briefly. I nodded and kept going.
It was only later — when an investor’s fund was approaching its end and conversations about a sale started in earnest — that I understood what I had agreed to. By then, the terms were fixed.
What follows is the conversation I wish someone had had with me before that first signing. Exit clauses are legal provisions in a term sheet that define how and when an investor can sell their shares. They are written to protect investor interests. That is legitimate and expected. But you need to understand each one before you agree to it.
That clock starts the day the fund is raised. By the time they invest in your company, part of that window has already passed. They will need to exit. Exit clauses are how that path gets written into the contract upfront.
The issue is not that these clauses exist. The issue is that founders often do not read them carefully until the situation they describe actually happens.
"The majority shareholders shall have the right to drag along all other shareholders to participate in a sale of the company on the same terms and conditions."
The scenario this clause addresses: a buyer wants 100% of your company. Most shareholders want to sell. But one or two minority holders do not. Without drag-along rights, even a 2% to 3% minority shareholder can hold up the entire deal. This clause prevents that.
With drag-along rights, the majority can require everyone to sell on the same terms. The deal goes through.
If the investor holds majority control and can trigger drag-along rights unilaterally, they can force a sale of your company on their preferred timeline, to a buyer of their choosing, whether you agree or not.
That is a meaningful position to be in, and not always one founders have thought through when they signed.
The drag-along trigger should require a combined majority that includes founders — not the investor acting alone. This is the most important thing to define clearly before signing.
"In the event that any shareholder proposes to transfer shares to a third party, all other shareholders shall have the right to participate in such sale on the same terms and conditions (tag-along rights / co-sale rights)."
If a major shareholder decides to sell their stake to a buyer, tag-along rights allow smaller shareholders to join the sale on the same terms. Without this right, a minority shareholder could find themselves holding shares in a company whose ownership has just changed — with no say in the matter and no clear way to exit.
If your lead investor sells their stake to a third party — say a large corporate group acquires their position — you could find yourself as a minority shareholder in your own company, under new ownership you never agreed to. Your own tag-along rights give you the option to exit on the same terms if that happens.
Check that tag-along rights run both ways. Founders often have them written in for investors but not for themselves.
"In the event that any shareholder proposes to transfer shares to a third party, all other shareholders shall have the right to participate in such sale on the same terms and conditions (tag-along rights / co-sale rights)."
In most structures, investors holding preferred shares are paid before founders and employees who hold ordinary shares. There are two main versions.
The investor gets back their original investment first. Whatever is left is then split among all shareholders based on ownership percentage. This is the most founder-friendly structure and the one worth pushing for.
When founders model this out carefully — which most do not do at signing — the impact is often more significant than they expected. A sale that looks good on paper can produce a much smaller founder payout once the participating preference structure is applied.
Push for 1x non-participating wherever possible. If an investor insists on participating preferred, negotiate a cap — they participate in additional upside only up to a defined multiple of their investment, after which it converts to ordinary equity. Always model your actual payout at different exit values before signing.
"After [5/7] years from the date of investment, the investor shall have the right to require the company to redeem all or part of the investor’s shares at the original subscription price plus a [X%] per annum return (Redemption Rights)."
Think of it as the investor’s fallback option. If the business is still private after the agreed period, they can require the company to buy them out at a defined price.
When redemption rights are exercised, the company has to find the cash to buy back those shares. For a healthcare business that is growing but not sitting on large cash reserves — which covers most — this creates serious financial pressure at exactly the wrong time.
Push to remove this clause entirely, or agree on a longer timeline that reflects the pace of healthcare businesses. Pre-seed investors should expect 8 to 10 years. Post Series A, 5 to 7 years is more standard. Most investors who understand the sector will accept this argument.
- A VC fund closing in 3 to 5 years will want exit rights that align with their fund timeline, regardless of whether that timeline suits your business
- An angel investor is typically more patient and flexible about timing
- A strategic investor — a pharma company or hospital group — often cares more about what the business looks like operationally than about financial return timelines
Knowing which type you are dealing with helps you anticipate where they will push — and where there is room to negotiate.
Healthcare businesses take longer to build than most technology companies. This is not a weakness — it is a structural reality of the sector. Use it as a clear, factual basis for negotiating longer timelines on redemption rights and exit windows. Investors who understand healthcare will accept this argument. Those who do not are often investors worth being cautious about.
Rather than trying to block an investor from selling, negotiate a right of first refusal — meaning if they want to sell their shares, you get the first opportunity to buy them or find an alternative buyer before they approach a third party. This gives you a meaningful say without obstructing the investor’s legitimate exit rights. Most reasonable investors will accept it.
A generalist corporate lawyer may not flag the nuances that matter in healthcare deals — regulatory approvals, clinical governance, how certain compliance gaps affect deal structure. The cost of getting the right advice upfront is small relative to what a poorly negotiated clause can cost you later.
- These clauses do not matter on the day you sign. They matter when a fund deadline arrives, when a buyer appears, or when one partner wants to sell and another does not.
By that point, you are working within whatever terms were agreed earlier. The time to understand them — and negotiate them — is before you close the round, not after.
- Aaditya KhemukaPartner at pharmapro20+ years of experience in investment banking and consulting.
Lived and worked in New York, London, Paris, and Mumbai. Cofounded a VC-backed digital healthcare venture for the India and US markets