Entrepreneur enters joint venture using Put & Call options
- John Deane
- Updated: Tue, 10th Jan 2017
Our client was an established entrepreneur. He ran a Fintech investment company that operated an online investment platform. He entered into discussions for a joint venture with an established technology company that wanted to develop a payment application. The entrepreneur’s assets and knowledge were needed by the technology company under the joint venture discussions.
Problems for the joint venture from the entrepreneur’s perspective
The entrepreneur saw value in the technology company’s objectives. However, the entrepreneur was not willing to:
- Sell his existing business to the technology company at the current valuation; or
- Give up his current role and work full time for the technology company.
However, both parties were keen to work together under a joint venture structure. The joint venture structure had to be formulated in a way which permitted the entrepreneur to remain independent. Independence was to be preserved until the price was right for the technology company to acquire the assets of the entrepreneur’s business.
The solutions found for making the joint venture work for the entrepreneur
We came up with a number of ideas:
- The entrepreneur works under a consultancy agreement. The entrepreneur would refer his industry contacts to the technology company and seek to establish channel partners. In return, the entrepreneur received commission linked to the “closed work” that the technology company received from his services.
- The technology company granted the entrepreneur an option to acquire shares, whereby he could acquire up to 11% of the technology company’s share capital.
- The entrepreneur licences his database software to the technology company, with an option for the technology company to buy the software, subject to the software reaching a specified value.
The details behind the joint venture
The joint venture had a number of aspects needing attention. The goal was to remove risk as far as possible for the entrepreneur. The key issues resolved are summarised below.
Intellectual property in a joint venture
The parties further entered into a licence agreement. The entrepreneur licenced his database software to the technology company, in return for a fixed royalty fee.
The licence agreement gave the technology company the option to buy the intellectual property in the software, subject to the software reaching a specified value. The software use algorithms to compile lists of potential customers and clients for the business.
Protection of business assets
It was important for our client to protect his industry contacts whilst the joint venture was operative. We inserted bespoke intellectual property provisions to the consultancy agreement.
The idea was that the punitive consequences if the technology company stepped outside of the restrictions provided the best chance of compliance. The restrictions agreed with the technology company operated so that:
- The technology company warranted and represented that at no time would it consider the contacts or clients to be its own.
- On termination of the agreement, the technology company would cease to contact the clients.
The consultancy agreement also included a provision that the technology company would, if requested by the entrepreneur, provide a signed statement confirming its compliance with the intellectual property provisions. That could be requested at any time during the term of the agreement.
To keep the entrepreneur engaged, the technology company proposed a share option. The option gave the entrepreneur the opportunity to participate in the technology company as a shareholder. The terms of the option were:
- The entrepreneur would acquire 5% of the technology company’s share capital at the end of year one.
- Each year thereafter, and providing the consultancy agreement had not been terminated, the entrepreneur could acquire a further 1.5%.
- The cap was set at 11%.
We prepared the appropriate tax advice that gave our client the full picture.
Shareholders’ agreement for the joint venture
We also suggested a shareholders’ agreement. That gave the entrepreneur certain rights to stop the directors of the technology company taking major steps without approval.
Put and call option over the entrepreneurs’ shares in the joint venture
We devised a put and call option arrangement over the entrepreneur’s shares. The idea was that the put and call options:
Call option: Entitled the technology company to “call” on the entrepreneur to sell his shares in the technology company back to the technology company, at a price equal to fair value. That could only be exercised after three years.
Our client wanted the option to exit if his time was required in his own business. To compliment the “call” option, we drafted a put option that:
Put option: Permitted the entrepreneur to “put” his shares in the technology company on the technology company, at a price equal to fair value.
The difference with the “put” option was that it could be exercised at any time, and was not subject to any qualification. That gave our client the opportunity to exit the joint venture at his election.
Articles of association
On behalf of the entrepreneur, we suggested changes to the technology company’s articles. One of those changes was to ensure that any shareholder holding equal to or in excess of 8.00% of the technology company’s share capital had the right to appoint a director.
The entrepreneur could then appoint himself as a director after year three, satisfying the criteria for entrepreneurs’ relief.
John Deane is a partner in the commercial team. John acts for a variety of entrepreneurs and established trading companies. Please do not hesitate to get in touch with John if we can be of assistance.