Why Entrepreneurs Should Exercise Caution in Equity Discussions

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Why Entrepreneurs Should Exercise Caution in Equity Discussions

When you’re starting or building a business, things can move very quickly. Entrepreneurs typically starting new ventures reach out to dozens of people who may or may not become part of the final company, to ascertain interest or recruit talent.

Often, an entrepreneur will take part in a discussion about equity allocation in the new venture to candidates he or she is particularly interested in bringing aboard. That discussion may even be very informal, conducted over a cocktail, on a running trail or in a brief email exchange. The entrepreneur may not even think twice about it, but the other person involved in the conversation may have a totally different take on the matter.

If that person eventually joins the team and becomes a valuable contributor, there should be no problem. However, if that person never works at the new company — or comes and goes quickly — that casual conversation about equity allocation can suddenly take on much more importance and put the new venture at risk.

Courts have typically found that these types of offers do not require formal written agreements to be legally binding, so someone an entrepreneur hoped to entice with promises of equity in the venture could still prove problematic. In fact, any communication that implies an offer has been made could be enough to thwart a company’s growth plans as it could stall venture funding or become a stumbling block prior to a liquidity event.

Before you have any discussions about equity allocation, be sure your venture has been legally formed, the equity has been formed and vesting terms put into place. Then grant equity right away to those who qualify.

When business disputes arise, you need experienced legal representation and advice. Williams Mestaz, L.L.P., is a law firm focusing on contract law, bet-the-company cases, and business divorce. Contact us at (602) 256-9400 and schedule a time to meet with us today.

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