Put Options Explained: A Practical Guide for Australian Startups and Founders

If you’re building a startup or growing a small business, you’ll probably have conversations about ownership sooner than you think. Maybe you’re bringing in an investor, offering equity to a key hire, or starting a venture with a co-founder. In all of those situations, one issue comes up again and again: what happens if someone needs to exit?

That’s where options come in. And if you’ve ever searched for “what is a put option”, you’re not alone. Put options aren’t just for stock markets and sophisticated finance deals - they show up in real-world Australian business contracts, especially where parties want a clear, enforceable pathway for someone to sell their shares or interest at a later date.

In this guide, we’ll walk you through what a put option is, how it works, and how it’s commonly used in Australian startups, founder arrangements, and small business deals - in plain English, with practical examples.

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What Is A Put Option?

A put option is a legal right (but not an obligation) for one party to sell an asset to another party at a certain price (or based on a pricing formula) within a certain timeframe or if certain events happen.

In the startup and small business context, the “asset” is usually:

• shares in a company;
• a unit or interest in a trust structure; or
• sometimes, another business asset (less common).

So, if you’re wondering what a put option is, a good shorthand is:

A put option gives someone the ability to “put” the shares onto another person and require them to buy.

Put Option Vs Call Option (And Why It Matters)

Options usually come in two main types:

• Put option: the holder can sell the asset to the other party.
• Call option: the holder can buy the asset from the other party.

In practice, many founder and investor deals use put options and call options together (sometimes called “put and call options”) to create a structured pathway for transfers of shares when things change.

Who Is Who In A Put Option?

It helps to name the roles:

• Option holder: the party who has the right to sell (they control whether the option is exercised).
• Option grantor: the party who must buy if the option is exercised (they’re “on the hook” if the trigger occurs).

In a founder arrangement, a put option is often held by a founder or investor, and the grantor might be another shareholder. Sometimes the company is involved too - but whether the company can buy back shares (or provide funding or assistance for someone else to buy) depends on the structure and compliance with the Corporations Act (including share buy-back and financial assistance rules).

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How Does A Put Option Work In Practice?

A put option isn’t just a concept - it’s a contract mechanism with a few moving parts. If you get these right, the option can be a clear, practical safety net. If you get them wrong, it can become a dispute magnet.

1) The Trigger Events

A put option usually becomes exercisable when a “trigger” happens. Common triggers include:

• Exit-related triggers: the business is sold, a major funding round occurs, or a listing happens.
• Founder/investor relationship triggers: a founder leaves, a key employee stops working, or a shareholder breaches key obligations.
• Deadlock triggers: the owners can’t agree on a major decision and a deadlock procedure has been exhausted.
• Time-based triggers: after a certain date (for example, after 3 years).

These triggers are often negotiated heavily, because they determine when the “forced buy” can occur.

2) The Exercise Process (How Someone Actually Uses It)

In most agreements, exercising a put option involves a formal notice process, such as:

• the option holder gives a written notice stating they’re exercising the put option;
• the notice identifies the shares/interest being sold;
• the pricing method is applied (or a valuation process starts); and
• the parties complete the transfer and payment by a set deadline.

This is one of those areas where clarity matters. If the steps are vague, you can end up with arguments about whether the option was properly exercised, whether deadlines were met, or whether a notice was valid.

3) The Price (Fixed Price Vs Formula Vs Valuation)

Put options usually set the price in one of three ways:

• Fixed price: simple, but can become unfair quickly if the business grows or declines.
• Formula price: for example, a multiple of EBITDA, revenue, or another metric.
• Valuation process: an independent valuer determines fair market value (often with rules to exclude “minority discounts” or include control premiums, depending on the deal).

There’s no one-size-fits-all approach. The “best” approach depends on what you’re trying to achieve - investor protection, founder flexibility, a clean exit pathway, or preserving cashflow.

4) The Funding (Where Does The Money Come From?)

A practical issue many businesses miss: a put option can create a real payment obligation.

If your agreement says another shareholder must buy shares at a set price, you should also think about:

• whether they will realistically have the funds to do so;
• whether payment can be staged (instalments);
• whether there are security or guarantee arrangements; and
• what happens if they can’t pay on time.

If the buyer under the put option is the company (for example, via a share buy-back), funding becomes even more important, because buy-backs are regulated in Australia and generally require the company to follow specific procedures and remain solvent. Separately, if the company is helping someone else buy (for example, by lending money or providing security), the Corporations Act financial assistance rules may also need to be considered.

In other words, the commercial terms should support the legal mechanism - otherwise you have a “right” that’s hard to enforce in a practical way.

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When Do Australian Startups And Small Businesses Use Put Options?

Put options pop up whenever parties want a clear pathway for an exit without relying on goodwill or future negotiations. Here are some of the most common business scenarios.

Founder Breakups And Co-Founder Exits

If you’re building a company with one or more co-founders, you’ll want to plan for the uncomfortable “what if” scenarios early. A put option can be part of a broader exit framework that deals with situations like:

• a founder resigning;
• a founder being removed for cause;
• a founder losing capacity to work; or
• ongoing deadlock between owners.

Often, these mechanics are documented alongside (or inside) a Shareholders Agreement, so everyone is on the same page from day one.

Investor Protection (Especially In Early Rounds)

Investors sometimes negotiate put options as a form of downside protection. For example, if certain milestones are not met by a set date, the investor may have the right to “put” their shares back to founders (or another party) for an agreed price or valuation method.

This is more common when an investor is taking on higher risk, or where the investor is strategic and wants a defined “off ramp” if the relationship doesn’t work out.

Key Employee Equity Arrangements

If you’re offering equity to a key employee, you might also want to clarify what happens when they leave. In some structures, a departing employee might have a put option (or you might instead have a call option, allowing you to buy back their shares).

The right structure depends on what’s fair and what keeps your cap table stable over time - and for employees, it’s also important to consider how the arrangement is documented and any tax and employee share scheme implications.

Business Sale And Succession Planning

In small businesses (including family businesses), put options can be used in succession planning. For example:

• a family member has the right to require the business (or other owners) to buy them out on retirement;
• an outgoing partner has the right to sell their interest after a set period; or
• a minority shareholder can require an exit in certain circumstances.

In these scenarios, the put option can remove ambiguity and reduce the risk of expensive disputes later.

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How Do You Document A Put Option In Your Agreements?

In Australia, a put option is usually documented in a written agreement (or in a suite of documents) that clearly sets out the triggers, price and process.

Depending on your situation, the put option may be included in:

• a standalone Option Deed;
• a shareholders agreement;
• investment documents (like subscription agreements); and/or
• sometimes, a company constitution (particularly where transfer mechanics need to align).

Key Clauses You’ll Usually Need

While every deal is different, most put option documents deal with:

• Grant of option: who is granting it, who holds it, and what exactly can be sold (which shares, how many).
• Exercise window: when the option can be exercised (dates and deadlines).
• Trigger events: the events that unlock the right to exercise.
• Exercise mechanics: notice requirements, deemed delivery rules, and what happens if someone doesn’t comply.
• Purchase price: fixed price, formula, or valuation methodology.
• Completion process: timing, payment method, and transfer steps.
• Warranties: what each party promises about ownership, title, and authority.
• Restrictions and approvals: any board approvals, pre-emptive rights, shareholder consent requirements, and (where relevant) compliance steps for company buy-backs or financial assistance.

Make Sure Your Documents Don’t Contradict Each Other

This is a big one. If you have multiple documents - for example a Company Constitution, a shareholders agreement, and a separate option deed - the terms need to align.

If one document says shares can’t be transferred without board approval, but another says an option exercise forces an immediate transfer, you can end up with uncertainty (and potentially a dispute) right when you need the mechanism to work smoothly.

What Does Completion Look Like?

When a put option is exercised, it often results in a share transfer process that resembles a mini transaction, including:

• share transfer forms;
• director resolutions;
• updates to the share register;
• payment mechanics (sometimes held in escrow-like arrangements); and
• updated shareholder details with ASIC where relevant.

If the structure involves a share buy-back by the company, the completion steps can look different (and may involve additional corporate approvals and procedural requirements).

In more complex exits, the put option might be paired with a broader Share Sale Agreement to document warranties, liabilities, restraints, and handover obligations.

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Key Risks And Legal Issues To Watch

A put option can be a powerful tool - but it needs careful drafting to avoid unintended consequences. Here are some of the main legal and commercial issues we see founders and business owners overlook.

Cashflow Pressure And “Forced Buy” Risk

If you (or your company) are the party who may need to buy under a put option, you should be realistic about:

• how large that payment could become;
• whether you can raise funds quickly if the trigger event happens; and
• what happens if you can’t pay (default provisions and remedies).

Sometimes the most workable solution is staged payments, a cap on price, or a longer completion timetable - but those are commercial points you want to negotiate upfront.

Pricing Disputes (Valuation Can Get Messy)

Valuation clauses often look simple until you need to use them. Common pain points include:

• what “fair market value” means in the context of a startup (where revenue might be low but growth potential is high);
• whether the valuation should assume a willing buyer and seller;
• whether discounts apply for minority holdings; and
• what happens if a valuer can’t be agreed (or if one party disputes the valuation).

The clearer the valuation mechanism, the less likely you’ll be stuck in a long (and expensive) argument at the worst possible time.

Corporations Act, Buy-Backs, Financial Assistance And Regulatory Considerations

Options over shares can raise legal considerations depending on how they’re issued, who they’re offered to, and the broader fundraising structure.

For example:

• if the company is expected to buy back shares when a put option is exercised, the share buy-back rules under the Corporations Act may apply (including process and solvency requirements);
• if the company is providing funding or security to help someone acquire shares, the financial assistance provisions may be relevant;
• if options are offered broadly (or structured in a way that resembles an investment product), there can be fundraising and financial services law implications.

You don’t need to panic - but it’s a good reason to get the structure reviewed as part of your broader fundraising plan, including early-stage documents like a Term Sheet. Also, this article is general information only and isn’t financial product advice; whether any licensing, disclosure or other regulatory steps apply will depend on your exact structure and the people involved.

Tax Outcomes (Don’t Leave This Until The End)

Tax isn’t the focus of this article, and nothing here is tax advice - but it’s worth flagging: options, share transfers, and forced buybacks can have tax consequences for both the seller and the buyer.

This can include capital gains tax considerations and, in employee contexts, potential employee share scheme treatment. It’s another reason why “standard” clauses copied from overseas templates can cause problems in Australia.

Confidentiality And Distraction Risk

Put options are often negotiated when relationships are tense (a founder is leaving, or the business is under pressure). If the documentation is unclear, you can end up with:

• disputes that distract you from running the business;
• uncertainty that scares off investors; and
• reputational or team culture issues.

Spending time upfront to create a clean, workable mechanism is usually far cheaper than trying to fix it when it’s already “live”.

Bring It Back To Your Bigger Funding Strategy

Put options often sit inside a larger commercial deal. If you’re raising capital, restructuring your cap table, or planning an exit pathway, it can help to map the option terms against your broader strategy - including when you might seek investor funding, how you’ll govern decision-making, and how you’ll handle disputes.

This is often part of a wider conversation through capital raising consult support, so your legal documents match the commercial reality of how your business is planning to grow.

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Key Takeaways

• A put option is a right (not an obligation) to sell an asset - commonly shares - to another party at an agreed price or valuation method.
• In startups and small businesses, put options are often used to create a clear exit pathway for founders, investors, or key stakeholders when certain triggers occur.
• Good put option drafting usually covers triggers, timing, a clear exercise process, a workable pricing mechanism, and practical completion steps.
• Put options can create real financial pressure, so it’s important to think about funding, staged payments, and default consequences upfront.
• If you have multiple governance documents (like a constitution and shareholders agreement), the put option terms should align so you don’t end up with conflicting rules.
• Because options can have broader legal and commercial implications (including valuation, Corporations Act compliance for buy-backs/financial assistance, regulatory issues and tax outcomes), it’s worth getting advice early rather than trying to patch things later.

If you’d like help putting a put option arrangement in place (or reviewing one you’ve been asked to sign), you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.