Fox Mulder’s motto was “Trust No One.” Lawyers can understand this. Oftentimes, the practice of law is all about being paranoid. We have to assume that your business partner will screw you over, or that your employer will not fulfill your expectations. Don’t rely on a handshake, oral promises, or vague documents to establish your ownership interest in a business entity. That’s true whether it is a Limited Liability Company, Family Business or Corporation. The courthouse steps are littered with the hopes of those who received false promises of equity.
Sometimes vaguely promised equity claims can prevail. I was part of a trial team that prevailed on an equity claim when a promise was literally written on a bar napkin. We obtained seven figures for our client. But you don’t want to have to roll the dice on a judge and jury. Get it and writing and make sure it is clear and without contingencies.
The greatest abuses I usually see are employees who are “promised” stock or stock options or some other type of equity interest in employment offer letters. These promises are often empty and meaningless, although they sound good, and the sales pitch makes it appear that everything will go swimmingly (“These are just formalities that are lawyers make us write.”). The devil is usually in the contingencies. You have to be employed to get the stock. Your stock has to be approved by the board. Vaguely defined profitability benchmarks must be reached. Some companies notoriously fire employees before the stocks vest. Others have boards that never approve the stock. It turns out, the “formalities” matter.
Sometimes people go into business with others and think that they are an “owner,” but have no documentation to prove it. Sometimes people deliberately do not document their ownership for some reason or another, be it a pending divorce, tax reasons, immigration reasons, a noncompete or some other reason. This failure can come back to bite you if your business partners get greedy (and they always do in my world). Others go to work for the family business expecting that they will be made owners, but it doesn’t always happen.
When you start or join a private business as an owner (you think), you are surely working very hard and devoting a great deal of effort and heart into making the business a success. Don’t leave it to chance that you are going to enjoy the fruits of your labor. Document your ownership interest and have a lawyer review the documentation. A few hundred of few thousand dollars in legal fees could literally save you millions. Put on your lawyer’s cap and try being paranoid until your interest is well documented.
If you are already in a situation where your claim to equity is tenuous or unclear, all may not be lost. Get legal advice now to see where you stand and what can be done. Avoiding the problem and hoping that things will work out is no way to go through life. There may be certain guerilla tactics (ethical ones) to strengthen your position. Even if your position is hopeless, you are better off knowing so you can decide to cut your losses and start over.
The above is general information, not legal advice.
By Adam P. Whitney