What is the put option?
Investors can return their profit participation rights to the company and receive compensation in return.
The put option is the right of investors to return their profit participation rights to the company at set times and receive compensation in return. The company can restrict it in the contracts or exclude it entirely. Whether and how it applies is therefore set out in the respective contracts.
What compensation do investors receive?
The company decides on the type of compensation. There are three options:
- Payout of the value of the profit participation rights at the current market price. The market price is derived from the current company valuation.
- Distribution of the value in the form of shares*
- Offer of new GmbH shares (known as conversion)
*If the GmbH has already been converted into an AG (stock corporation) or the conversion is planned within the next 9 months.
Investors who convert their profit participation rights into GmbH shares can be pooled to keep the cap table clear. This can be done through a classic SPV or through a contractual arrangement on voting.
When is exercising it worthwhile?
In our experience, many investors prefer profit participation rights because they are transferable (more on tradability), and the put option is rarely used.
In many cases, exercising it brings no economic advantage and restricts transferability. It mainly makes sense if investors want to exercise legally secured co-determination or information rights as shareholders. In practice, however, co-determination only becomes relevant with a larger number of shares.
Standard rule in the standard contracts
To keep effort and costs manageable, the put option in the beel standard contracts can by default only be exercised once per quarter:
- The last day of the quarter is the record date.
- From this day, investors have one week to register the exercise.
- They state how many profit participation rights they want to return.
- Only whole profit participation rights can be returned, no fractions.
How can the company restrict the put option?
In addition to the standard rule, the company can restrict the put option in the contracts in two ways:
- Intervals: the company sets how often the put option may be exercised, for example quarterly, semi-annually or annually.
- Minimum number: investors must hold a minimum number of profit participation rights to exercise the put option. This reserves it for larger investors.
How is the value determined?
After the exercise, the company has 6 weeks to determine the value of the returned profit participation rights and inform the investors.
- If the company has already been converted into an AG and the shares are traded to a significant extent, the average price of the shares applies.
- Otherwise, the highest value from these three methods applies:
- valuation of a relevant financing round in the last 12 months
- average price of the profit participation rights, if they have been actively traded
- valuation by an independent auditing firm. Investors can also commission their own valuation at their own expense. In that case, the average of both valuations applies.
Investors can withdraw the exercise within one month after the value is announced and keep their profit participation rights.