Justine is a legal consultant at Sprintlaw. She has experience in civil law and human rights law with a double degree in law and media production. Justine has an interest in intellectual property and employment law.
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If you’re building a business, partnering with someone new, or planning an investment, you’ll often reach a point where you want certainty - but you might not be ready to commit today.
That’s where an option deed can be a powerful tool. In simple terms, it’s a legal agreement that gives someone a right (but not an obligation) to do something in the future - most commonly, to buy or sell shares, or to acquire an asset or business interest - on pre-agreed terms.
Option deeds are common in Australian startups and small businesses because they can help you manage growth, protect your position, and plan for different “what if” outcomes without forcing everyone to make a final decision immediately.
Below, we’ll walk you through what an option deed is, when you might need one, what it usually covers, and the common traps to avoid so you can move forward with confidence.
What Is An Option Deed?
An option deed is a contract where one party grants another party an option - meaning a right to do something later, usually within a certain timeframe and on specific terms.
The important part is this: an option is generally a one-sided right.
- The person who holds the option can choose whether to exercise it.
- The person who grants the option is usually bound to proceed if the option is exercised correctly.
In an Australian business context, option deeds most commonly deal with:
- Share options (e.g. the right to buy shares in a company later)
- Call options (right to buy)
- Put options (right to sell)
- Put and call arrangements (often used to plan exits)
- Options linked to performance (e.g. hitting KPIs, remaining employed, meeting milestones)
Option deeds are often used alongside other documents that set the broader rules of the relationship - for example, a Shareholders Agreement and a company constitution.
Option Deed vs “Handshake Deal”
It’s common for founders or business owners to say something like: “If you stay for 12 months, we’ll give you 10%,” or “If we hit $X revenue, you can buy in.”
Those statements may reflect good intentions, but they can become a major source of conflict if the details aren’t clear. An option deed helps turn that future plan into something practical and enforceable, with a clear process for how the option works.
What Does “Deed” Mean In Australia?
A deed is a type of legal document that has particular formal requirements. In many situations, deeds are used because they can carry more legal weight than an ordinary contract and may not require “consideration” in the same way a standard contract does (although consideration is still commonly included in commercial arrangements).
In practice, what matters most is that your option deed is structured correctly and matches the commercial deal you’re trying to achieve.
If you’re looking at preparing one, the Option Deed package is often used where parties want clearly drafted option mechanics without reinventing the wheel.
When Would You Use An Option Deed?
Option deeds are used when you want to lock in a future pathway - without forcing an immediate purchase, sale, or transfer today.
Some common scenarios include:
1. Bringing On A Co-Founder Or Early Team Member (Without An Immediate Equity Transfer)
Many businesses want to reward someone with equity, but only after they’ve proven themselves or stayed long enough to justify it. This might be because:
- you want commitment before handing over ownership
- you’re still working out the long-term relationship
- you’re protecting the business from someone leaving early with equity
In these situations, an option deed can work alongside a Share Vesting Agreement (or similar vesting mechanics) to ensure equity is earned over time, not just promised.
2. Planning A Business Exit Or Buyout (Put/Call Options)
If there are multiple owners in a company, it’s smart to plan for circumstances like:
- one owner wants to leave
- there’s a dispute
- someone becomes unable to work (illness/injury)
- someone breaches key obligations
A put and/or call option can act like a “pre-agreed exit lane.” Instead of scrambling to negotiate during a stressful event, the option deed can set out:
- who can force the sale or purchase
- how the price is calculated
- how the transfer happens
3. Investment And Funding Arrangements
Sometimes an investor wants the right to increase their stake later, or the company wants flexibility to issue equity if certain conditions are met.
Depending on the structure, you might see option mechanics used alongside early-stage funding documents such as a Term Sheet (to outline the deal at a high level), before the final legal documents are signed.
4. Strategic Partnerships Or Joint Projects
In partnerships, an option can help manage uncertainty. For example, you might agree that:
- if the joint project performs well, one party can buy out the other
- if a milestone is missed, one party can exit by selling their interest
This kind of structure can be particularly helpful where value will change over time and neither party wants to guess the “right” price today.
How Does An Option Deed Work In Practice?
Most option deeds follow a similar lifecycle: grant → option period → exercise (or expiry) → completion.
Here’s what that generally looks like.
Step 1: The Option Is Granted
The party granting the option agrees to provide the option holder with the right to do something later (often to buy shares or an interest in a business).
The deed should clearly identify:
- who the parties are
- what the option applies to (e.g. specific shares, a percentage, or an asset)
- any conditions that must be met before exercise (if applicable)
Step 2: The Option Period Runs (Including Any Conditions)
Options usually have a timeframe. For example, the option may be exercisable:
- at any time between two dates
- only after a “vesting date”
- only if certain performance targets are achieved
This is where drafting matters a lot. If the conditions or dates are ambiguous, you can end up in a dispute about whether the option was validly exercisable.
Step 3: The Option Is Exercised (Or It Expires)
To exercise the option, the option holder typically needs to follow a strict process, such as:
- giving a written notice of exercise
- paying an exercise price (if applicable)
- providing supporting documents (if required)
If the option isn’t exercised properly, it may be invalid. If it isn’t exercised before the deadline, it may expire.
Step 4: Completion (Transfer/Issue Of Shares Or Asset Transfer)
Once exercised, the deed usually sets out how completion happens, including:
- share transfer forms / share issue mechanics
- board approvals (where required)
- updates to registers and company records
- payment timing
This is also where the option deed should align with your broader governance documents. For example, if your Company Constitution contains pre-emptive rights or transfer restrictions, your option deed needs to be consistent with those rules (or deal with how conflicts are handled).
What Should An Option Deed Include?
Every deal is different, but most well-drafted option deeds will cover a set of key commercial and legal terms.
Key Commercial Terms
- Option type: call option, put option, or both
- Option interest: what is being acquired or sold (e.g. shares, units, business assets)
- Exercise price: fixed price, formula, or valuation process
- Option period: start date, end date, and any extension rights
- Conditions precedent: milestones, continued employment, performance targets, regulatory approvals
Exercise Mechanics
- How to exercise: notice requirements, delivery method, required content
- Timeframes: how quickly completion must occur after exercise
- Payment terms: upfront vs instalments, deposit requirements, interest (if any)
Valuation And Pricing Provisions
Pricing is one of the biggest friction points in option arrangements. Common approaches include:
- Fixed price (simple, but may become outdated quickly)
- Formula-based price (e.g. EBITDA multiple, revenue multiple)
- Independent valuation (more flexible, but can be expensive and slower)
If the option deed uses an independent valuation, you’ll usually want clarity on:
- who appoints the valuer
- what happens if the parties disagree
- what information the valuer can access
Restrictions And Protections
Depending on the relationship, an option deed may also include:
- confidentiality obligations
- non-compete or non-solicitation provisions (where appropriate)
- restraints on transferring the option to someone else
- default and termination clauses
These clauses can be commercially sensitive, so it’s worth getting the wording right - particularly where the option is tied to someone’s role in the business.
Execution Requirements
Because it’s a deed, signing requirements matter. If a company is signing, it may need to be executed correctly (for example, in accordance with the Corporations Act rules).
It’s also important that the option deed works cleanly with your other business documents - especially if your ownership structure is changing over time.
Common Mistakes With Option Deeds (And How To Avoid Them)
Option deeds can be straightforward in concept, but the details are where deals often go wrong. Here are some common traps we see, and how you can avoid them.
1. Being Vague About The Exercise Price
If the deed says the price is “to be agreed” later, you can end up with no workable mechanism when it matters most.
Even if you don’t want to lock in a number, you should lock in a method (formula or valuation process) so there’s a clear path forward.
2. Confusing “Issue Of Shares” vs “Transfer Of Shares”
In companies, there’s a big legal and commercial difference between:
- issuing new shares (which can dilute existing shareholders), and
- transferring existing shares (which changes who owns what already exists).
Your option deed should clearly state which is intended, because it affects control, dilution, approvals, and sometimes tax outcomes.
3. Not Aligning The Option Deed With Other Documents
Option deeds rarely exist in isolation. They often need to work alongside:
- a constitution
- a shareholders agreement
- employment or contractor arrangements
If these documents contradict each other, you can end up with disputes about which document “wins” - or you may find the option can’t practically be completed.
4. Forgetting What Happens If Someone Leaves Or Things Change
If the option holder is also an employee, contractor, director, or co-founder, the deed should usually deal with what happens if they:
- resign
- are terminated
- stop performing services
- breach key obligations
It’s much easier to agree on these outcomes upfront than to renegotiate when emotions are high and the business is under pressure.
5. Treating The Option Deed Like A Template Without Checking The Commercial Reality
Option deeds look similar on the surface, but small differences can change the risk profile dramatically - for example, whether the option is automatic vs conditional, or whether exercise can happen in a short window or across multiple years.
Drafting should reflect what you’re actually trying to achieve in the relationship.
What Other Legal Documents Are Commonly Used With An Option Deed?
Option deeds often form part of a broader “legal toolkit” for running and growing your business. Depending on your situation, you may also need:
- Founders documentation to clarify roles, contributions, decision-making, and what happens if someone exits - often covered in a Founders Agreement.
- Shareholding rules around transfers, approvals, drag/tag rights, and deadlock processes - commonly handled in a Shareholders Agreement.
- Company governance rules (particularly if you need to manage share issues/transfers, director powers, and shareholder rights) - often set out in a Company Constitution.
- Employment documentation if the option is tied to someone working in the business - for example, a properly drafted Employment Contract to align incentives, duties, and exit outcomes.
- Vesting arrangements where equity is earned over time, milestones, or continued service - often supported by a Share Vesting Agreement.
Not every business needs all of these documents, but if your option deed is part of a bigger ownership or growth plan, it’s worth making sure everything fits together cleanly.
As a general rule, the more valuable the business becomes, the more you’ll appreciate having the fundamentals written down clearly from the start.
Key Takeaways
- An option deed gives one party the right (but not the obligation) to buy or sell shares, an interest, or an asset in the future on pre-agreed terms.
- Option deeds are commonly used in Australia for equity incentives, co-founder arrangements, planned exits (put/call options), and strategic partnerships.
- A practical option deed should clearly cover the option period, exercise process, pricing method, and what happens if circumstances change (like someone leaving the business).
- Pricing and valuation terms are often the biggest source of disputes, so it’s important to document a workable mechanism rather than leaving it “to be agreed”.
- Option deeds usually need to align with your wider business documents, including your constitution, shareholder arrangements, and employment terms.
If you’d like help preparing an option deed (or reviewing an option you’ve been offered), reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
Justine Wulegal consultant
