What are redeemable convertible preferred shares (RCPS), and why are they widely used in pre-IPO investment?

RCPS are preferred shares that combine the features of convertible shares, which can be converted into another class of shares, and redeemable shares, which the company can retire out of its profits after a certain period from issuance.

The Korea Exchange explains that venture finance firms often use them when investing in venture companies, and that from the investor's point of view they reduce investment risk because the investor can choose whether to exercise the redemption right or the conversion right. Most carry a special clause for resetting the conversion ratio (refixing), and provisions on participation in management, such as voting rights, are often included in the articles of incorporation and the investment agreement. However, since redemption is made out of the company's profits, it may be hard to get money back even with a redemption right if the company has no profits available for redemption.