Meaning
Financial instruments providing contractual rights to sell shares at a fixed price. The put options provide a mechanism for holders to liquidate their position at a set value during a specific timeframe. This instrument acts as a hedge against a decrease in the share price.
It establishes the boundary where the company or an investor is obligated to buy back equity.
Liquidity Provision
Founders who have most of their wealth tied up in a single company often need a way to diversify. The put options give them the right, but not the obligation, to sell their shares back to the company or to another investor at a predetermined price. This provides a safety net that allows the founder to take long-term risks without fearing a total loss of personal liquidity.
It identifies the floor of the founder’s financial return.
Valuation Floor
The price set in the agreement acts as a minimum value for the founder’s stake. When put options are exercised, the company must have the cash or the ability to find a buyer. This can be a substantial cost in terms of capital reserves.
Exercise Window
Exercise periods are typically only available during certain dates. They may also be tied to specific events like a change in control or the founder’s departure from the board. This limits the company’s exposure to sudden cash outflows.
