Enforcing Informal Promises In Corporate Formation Disputes
Informal preincorporation equity promises fail against statutory board authorization requirements, converting ungrounded ownership claims into cash restitution.
preincorporation promise
Meaning
An agreement entered into by founders on behalf of a proposed business before it has been officially registered as a corporation. A preincorporation promise governs relationships with early suppliers or service providers who agree to perform work before the legal entity exists. This arrangement enables early progress but carries specific risks.
Liability Allocation
Individual founders retain personal responsibility for the obligations unless a formal release is executed. If the venture fails to incorporate or refuses the contract, the person who made the preincorporation promise remains personally liable for the outstanding amounts. This exposure can lead to costly legal disputes.
Legal Ratification
The newly formed company must adopt the agreement to relieve the founder of personal liability. Once the business is active, the board passes a resolution that adopts the preincorporation promise and assumes the contract. This transfer is called novation.
Administrative Consequence
Failing to properly transition these early agreements consumes considerable corporate resources and legal advisory hours. If the executive team forgets to ratify a preincorporation promise, the resulting ambiguity about who owns the asset or owes the debt can halt future investment rounds. This administrative failure forces startups to redo their legal paperwork under tight deadlines when institutional investors begin audits.