As part of the agreement, the Finnish phone maker and Redback will cooperate on a wide range of broadband efforts.
The financial part of the deal will help Redback out of its current cash crunch and improve the company's access to international customers, analysts said.
Redback's stock rose 38 cents, or 16 percent, to $2.65 Wednesday after the deal was announced. The stock had moved up earlier in the week on rumors of the deal.
The agreement calls for Nokia Networks, the infrastructure arm of Nokia, to work with Redback to increase its broadband business, cooperate on product development, and increase global distribution efforts.
"This strategic announcement brings us financial security, but more importantly a chance to work with the wireless leader," Redback CEO Kevin DeNuccio said in a conference call Wednesday morning.
"We signed this deal to expand distribution in Asia and Europe," added Dennis Wolf, Redback's chief financial officer.
Nokia will take a 10 percent stake, or around 17.7 million shares of unregistered common stock, in Redback, with an option to increase ownership up to 20 percent. Nokia will also take a seat on the San Jose, Calif.-based company's board of directors.
Analysts said that the investment comes just in time for Redback.
"We believe the company will need the cash to service its debt and burn rate," said Richard Church, an analyst at equity research firm Wachovia Securities. Church said he expects Redback to go through $30 million in its second quarter.
The partnership will focus on products for network operators and service providers building broadband networks, Nokia and Redback executives said. The companies said they first plan to link products in the digital subscriber line and "edge" markets. The edge is the junction point where a network operator connects to a business customer.
Nokia and Redback said they will announce additional joint technology projects over the next several months.
The global aspect of the partnership is important in helping Redback compete with rivals such as Cisco Systems and the newlyJuniper Networks.
Juniper's recentof Unisphere Networks was seen as a negative for Redback, according to Church, who said that Unisphere had been a tough competitor in Asia and that it recently won some Redback customers such as Bell Canada.
"With Juniper's support, scale and reach, the Unisphere line becomes a much more difficult competitor for Redback," Church said.