Your new business needs to acquire two things: investment and talent. Many entrepreneurs will put their elevator speech to dozens of prospective individuals who might make up a critical part of the established company–a process that will often move like a whirlwind.
And, like a whirlwind, there’s a great deal of risk involved. It’s not uncommon for an entrepreneur to bring the topic of equity allocation into a discussion over a new venture. Though the talk with a potential candidate may seem to take place very informally–drinks at the bar, on the squash court, or through a phone call–the perception of both parties may differ wildly.
This poses no problem if that person is brought on board and proves themselves a valuable contributor. Others, however, might get on board only to leave within weeks, or not even join the company at all, yet endanger the future of your entire enterprise because of that ‘casual’ talk about equity.
In a world in which so much requires formal written agreements to be legally binding, it may come as a shock to you that courts have consistently found that such spoken promises do enter both parties into an agreement. That’s why it is vital that you pursue this kind of outreach with the utmost of caution. Particularly in advance of venture funding or a liquidity event, this kind of disagreement can overturn a company’s carefully-laid plans.
The best way to avoid this is to set in place the safeguards that will allow you to discuss equity without risking a conflict. First, your company must have been legally formed, with all equity and vesting terms already established. And then, equity should only be granted to those you choose, and the transaction should be memorialized in a written agreement.
We help business owners avoid costly legal disputes through proactive business planning, including crafting agreements and procedures to ensure you comply with state and federal law. To learn more about our personal approach to business planning, call us today at 612-206-3701 or via our online contact form to schedule a small business consultation session.
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