Puts . . .
are an investor’s right to force a company or
another shareholder to purchase his shares for an agreed-upon price.
Puts usually appear in a written agreement such as a financing or
shareholders’ agreement. Puts provide investors with wanted
liquidity but at a significant cost to the company. Because they are
exercisable at the will of the shareholder (although sometimes only
after a certain event has occurred), puts can be exercised at a time
that is inconvenient for the company, forcing the company to devote
its resources to paying off the investor when it needs to devote them
to its operations. For example, an investor may exercise a put of
100,000 shares of common stock when the formula put price entitles him
to receive $500,000 for those shares. Without the put, management
might have used that $500,000 to purchase needed equipment or to
expand inventory to meet the demands of growing sales. The exercise of
the put forces the company to delay its plans and to search for funds
to replace the $500,000 withdrawn from the company. See:
Stock, Liquidity Agreements.