Meaning
An agreement by a founder or company to issue stock or ownership interest to a party that has not been executed. In disputes between early-stage partners, an unperformed equity promise often appears as a written or oral agreement to grant shares in exchange for sweat equity, funding, or services. It is a contractual obligation that remains unpaid at the time of a dispute or exit.
The boundary is crossed when the shares are formally issued and recorded in the stock ledger.
Contractual Right
These arrangements are frequently made in the early days of a venture when cash is scarce. Founders agree to pay contributors with future stock instead of wages. However, if the business succeeds, the founders may refuse to issue the promised shares.
This creates a legal claim for breach of contract by the contributor.
Proof Burden
Proving that such a promise was made is difficult when there is no written contract. Courts must look at emails, texts, and witness testimony to determine if an agreement existed. This makes oral agreements risky and expensive to litigate.
Financial Consequence
When a court finds that a promise was breached, it can order the company to issue the shares or pay damages. The damages are calculated based on the value of the stock at the time of the breach. This can result in a major financial liability that can bankrupt a young company.
