Meaning
Informal commitments occur when a leader makes promises regarding equity or compensation that have not been formally approved by the board of directors. These unratified executive promises often exist as emails or verbal agreements that lack the necessary legal signatures. They create substantial uncertainty for the company because they do not appear in the official capitalization table.
These unrecorded items pose a threat to the clean title of the business.
Enforcement Limit
Oral pledges are often legally unenforceable if the corporate bylaws require board consent. When unratified executive promises are discovered, they must be settled. This conflict leads to a breakdown in trust.
Transaction Delay
Potential buyers will not close a deal until all claims on the company are resolved. The presence of unratified executive promises requires a forensic search of communication records to identify every potential claimant. This search costs time and legal fees while increasing the risk that the deal will collapse.
Corporate Governance
Proper record keeping prevents these issues by ensuring that every promise is backed by a board resolution. Following a strict protocol for issuing equity eliminates the danger of unratified executive promises. This protocol protects the founder from personal liability and ensures the company is ready for a sale at any time.
