Meaning
An informal agreement occurs when a founder commits to distributing shares of a company to a recipient without executing a written contract. In early stage startup operations, oral equity promises often arise during early recruitment or co-founder discussions when formal legal documentation is postponed. These commitments create considerable administrative and legal liabilities when the company matures and seeks outside investment.
The lack of a written, dated record makes it difficult to verify the terms of the grant and the vesting schedule.
Informal Commitment
Informal commitments frequently lead to high-stakes disputes when a company achieves a high valuation. Early team members may recall a promise of a fixed percentage of the company, while the founder recalls a smaller grant or one tied to milestones that were never met. These divergent memories are difficult to reconcile without a formal capitalization table or written agreement.
Securities Regulation
Securities laws generally require a written instrument to execute a valid transfer of equity. In many jurisdictions, an oral agreement to transfer shares cannot be enforced if it violates the statute of frauds. Founders who make these promises expose the company to claims of breach of contract, even if the shares cannot be legally issued under corporate law.
This risk can deter venture capital investors who demand a clean capitalization table.
Resolution Path
Resolving these disputes usually requires a settlement that replaces the oral promise with a written equity grant or a cash payment.
