Extinguishing Early Share Promises Before Institutional Venture Rounds
Early verbal share assurances dissolve when founders execute formal legal releases and standardized equity agreements prior to institutional venture rounds.
oral stock grant
Meaning
An informal promise represents an unwritten agreement by a founder to award shares or options to an early contributor without formal board resolution or signed paperwork. While common in early stages, an oral stock grant is legally ineffective under almost all corporate statutes, which mandate that all equity issuances must be authorized in writing by the board of directors. This creates a severe gap between what the worker believes they own and the reality of the cap table.
Validity Dispute
Disputes over these informal commitments usually emerge when the company is preparing for a funding round or an acquisition. The early worker expects a specific ownership percentage based on past conversations, but the corporate record books show nothing. When the board refuses to recognize the oral promise, the worker may bring a lawsuit claiming breach of contract or promissory estoppel.
This litigation can delay transactions and cost thousands of dollars to resolve.
Proof Burden
The burden of proof falls on the claimant, who must produce emails or witnesses to back up their claim.
Rectification Action
To avoid these disputes, all equity commitments must be put in writing and approved by the board before any work begins. A company should require every worker to sign an offer letter that explicitly states that all equity awards are subject to board approval and written option agreements.