Meaning
Informal promises regarding equity or future bonuses are common in early-stage startups before formal contracts are drafted. Disagreements arise when unwritten compensation is claimed by an early employee after the company secures institutional funding or faces a transition. This category includes verbal assurances of stock allocation and handshake agreements about salary increases, while excluding official option grants and signed contracts.
It presents a major source of legal liability during corporate audits.
Dispute Hazard
The lack of written documentation makes these promises difficult to verify and easy to misunderstand over time. When unwritten compensation is claimed, the board must often investigate historical emails, chat logs, and recollections to determine the validity of the statement. This search consumes valuable hours and can lead to expensive payments to avoid litigation that might derail a funding round.
If the claimant possesses some form of written correspondence that hints at the promise, the legal risk increases. Resolving these disputes before an acquisition is necessary to protect the transaction.
Preventative Action
Corporate managers must implement a policy that requires all employment terms to be recorded in signed documents. If an informal agreement is made, it should be formalized immediately in an addendum or a new contract. This practice eliminates the ambiguity that can lead to future conflicts.
Investor Requirement
Institutional investors usually demand that all employees and consultants sign detailed release forms that disclaim any additional rights to equity or cash. This diligence step ensures that no hidden claims will emerge to dilute the new shareholders. Having these releases in place is a standard prerequisite for closing a round of funding.
