Judicial Valuation Mechanics For Unenforceable Equity Promises In Early Stage Disputes
Judicial valuation of unenforceable startup equity balances replacement wage restitution against synthetic discounted equity modeled at repudiation.
synthetic cap sheet
Meaning
A model reconstructs the prospective ownership structure of a company by incorporating unexecuted equity promises and informal verbal agreements. The synthetic cap sheet is used by founders to understand the true dilution they face before entering formal investment negotiations. This tool governs the tracking of informal commitments made to early employees and advisors who have not yet received formal stock options.
It ceases to be useful once all commitments are formalized in a legally binding cap table.
Dilution Analysis
The model reveals the gap between the registered cap table and the promised reality. By listing every informal pledge, founders can see the final ownership percentage they will retain. This prevents the over-allocation of equity to new investors.
It brings transparency to informal agreements.
Advisory Risk
The risk of ignoring these informal promises is that they can lead to legal claims during a liquidity event. When an early advisor claims they were promised a percentage of the company, the synthetic cap sheet provides a way to estimate the cost of resolving that claim. This estimate is essential for negotiating settlements.
It helps avoid unexpected legal blocks on a transaction.
Scenario Planning
Planning for future rounds requires simulating various investment sizes. This calculation shows the impact of new capital on existing shareholders.