Call Options in Contracts: A Plain-English Guide
What Is a Call Option?
A call option gives one party the right — but not the obligation — to purchase an asset from another party at a predetermined price within a specified timeframe. The seller of the asset is obligated to sell if the call option is exercised.
Where Call Options Appear
Outside of financial markets, call options are found in many business agreements:
- Shareholder agreements — a company or majority shareholders can force a departing member to sell their shares at a formula price
- Employment agreements — an employer retains the right to repurchase equity granted to an employee if they leave
- Real estate — a buyer secures the right to purchase property at today's price within a future window
- Licensing agreements — a licensee can acquire full intellectual property rights at a later date
Key Terms to Review
- Strike price — the predetermined purchase price, which can be fixed, formula-based, or tied to fair market value
- Expiration — the deadline by which the option must be exercised or it lapses
- Triggering events — whether the option is available at any time or only upon specified events (e.g., termination of employment, change of control)
- Consideration — whether the holder paid anything for the option itself
Practical Implications
If you are on the receiving end of a call option, someone else controls whether you keep your asset. This is particularly important in employment contexts, where a departing employee's shares may be called away at a below-market price.
When to Consult a Lawyer
Consider legal counsel before signing any agreement granting someone a call option over your shares or property, especially if the strike price is fixed rather than tied to current market value.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.