Meaning
Legal arguments stating that a contract is not fully enforceable because one party only provided a small portion of the value they promised describe this term. A partial consideration defense challenges the validity of an equity grant or a buyout agreement based on a failure of performance. It suggests that the agreement was a two-way street and since one side did not deliver, the other side is released from their full obligation.
This defense stops being valid once the recipient of the partial value has accepted it without objection for a long period.
Contractual Failure
Implementation of this strategy occurs when a founder promises to stay for four years but leaves after six months. The partial consideration defense allows the company to argue that the founder should only get a fraction of their promised shares. It turns the contract from an all-or-nothing deal into a pro-rata exchange of value.
This prevents a person from walking away with a massive windfall after doing almost no work. The record of what was actually delivered is compared against the list of promises in the founding document.
Evidence Requirement
Success in using this argument depends on a clear record of the missed milestones or the unperformed tasks. A partial consideration defense requires more than just a claim that the founder was lazy. It needs emails and software logs showing that the promised contributions never happened.
If the company cannot prove a specific failure, the court will usually uphold the original contract. This makes the keeping of regular performance records a vital task for any board of directors. The absence of these records can lead to the total failure of the defense in court.
Litigation Impact
Cases using this defense often lead to a court-ordered restructuring of the cap table. A partial consideration defense can save a company from being owned by people who no longer contribute to its success.
