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 The exercise of the put forces the company to delay its plans and to search for funds to replace the $500,000 withdrawn from the company.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: Calls, Cash Flow, Convertible Preferred Stock, Liquidity Agreements.