Put and Call options

An established entrepreneur instructed us to protect his interests in agreements with a notable technology company.

Our client ran a Fintech investment company that operated an online investment platform. The technology company wished to develop a payment application using our client’s IP assets and knowledge. The parties entered into discussions about a joint venture which included put and call aspects.

As you will see from the below, put and call options are often part of a complicated set of rights, protections and restrictions in a complex corporate commercial transaction.

Gannons can assist whether you need advice on put and call options or other issues detailed below, so please do get in contact.

The entrepreneur’s problem with a joint venture

While both parties were keen to work together under a joint venture structure, the entrepreneur had two major problems with doing so which needed addressing. Firstly, our client was unwilling to sell his existing business to the technology company at it's current valuation. Secondly, he did not wish to give up his current role and work full time for the technology company.

Structure of the joint venture

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.

We came up with the right structure to make the joint venture work. This involved:

• Consultancy - The entrepreneur would work under a consultancy agreement. He entrepreneur would refer his industry contacts to the technology company and seek to establish channel partners. In return, he would receive commission linked to the “closed work” that the technology company received from his services.
• Shareholders agreement - giving the entrepreneur certain rights to stop the directors of the technology company taking major steps without his approval.
• Put and call options - see below
• Protections in the technology company's articles of association - One of the changes was to ensure that after acquiring 8% of the technology company’s share capital our client had the right to appoint a director.

Option agreement

To keep the entrepreneur on board, the technology company proposed granting share options, giving him the opportunity to participate as a shareholder.

The entrepreneur would acquire 5% of the technology company’s share capital at the end of year one. For every year that the consultancy agreement continued thereafter, our client could acquire a further 1.5%, up to a maximum 11% stake.

We also prepared the appropriate tax advice that gave our client the full picture.

Option to buy the IP

In return for the option over shares and the entrepreneur licensing his database software to the technology company, the technology company would be given the option to buy the software if it reached a specified value. The software uses algorithms to compile lists of potential customers for the business.

Interim protection in addition to put and call provisions

It was important for our client to protect his industry contacts whilst the joint venture was operative. Therefore we inserted bespoke intellectual property protections into the consultancy agreement including that :

• The technology company warranted and represented that at no time would it consider the contacts or customers to be its own. Furthermore on termination of the agreement, the technology company would cease to contact the customers.
• The technology company would, if requested by the entrepreneur, provide a signed statement confirming its compliance with the intellectual property provisions.

Corporate put and call option

We devised a put and call option arrangement over the entrepreneur’s shares.

Call option

This entitled the technology company to “call” on the entrepreneur to sell his shares in the company back, at a price equal to fair value. The company could only exercise this option after 3 years had passed.

Our client also wanted to have the ability to exit the joint venture in case he had to spend time at his own business. To complement the “call” option, we also drafted a put option.

Put option

This let the entrepreneur require the technology company to buy his shares, at a price equal to fair value.

The difference from the “call” option was that the "put" option could be exercised at any time and was not subject to any qualification.