Meaning
Verbal assurances or unrecorded commitments regarding future benefits create a shadow layer of obligations within an organization. These informal promises often involve equity grants, promotions or bonuses that were never put into a written contract. While they are intended to build trust in the short term, they frequently lead to friction when the company reaches a milestone.
A lack of documentation makes these claims difficult to value or fulfill.
Reliability Limitation
Memory is an unstable foundation for a business arrangement. Parties often recall the details of informal promises differently, leading to feelings of betrayal even when no malice was intended.
Oral Testimony
Disputes over unwritten agreements often rely on the word of one person against another. In a legal setting, informal promises are weighed by assessing the credibility of the speakers and any actions taken in reliance on the word. If a person worked for a year without pay, a court might find that a promise of equity was likely made.
A documented history of contributions supports the claim that an agreement existed between the parties.
Enforcement Risk
Success in the market increases the likelihood that someone will attempt to collect on a verbal deal. Because informal promises are rarely included in the initial disclosures to investors, they can appear as hidden liabilities. The cost of settling these claims can exceed the value of the work originally performed.
