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Is a promise of equity binding before it is on paper?

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It can be. Equity is issued by a board resolution and a signed agreement, but a spoken promise of a stake, relied on by someone who then works for months because of it, can be a contract, and the argument over what was promised is one of the commonest founder disputes there is. The dangerous sentence is the one founders say to people who have helped them: you will get two percent. It is a promise of a percentage of a company that has no fixed number of shares, and it will be remembered differently by both sides. The safe sentence is conditional and names the process: if we bring you on, we would recommend to the board an option for 25,000 shares, vesting over four years. That sets an expectation without creating a claim if the plan changes.

Why loose promises cost more than they seem

A promise of a percentage does not say whether it is before or after the seed round and the option pool, so the person expects a number that shrinks with every round and feels cheated each time. A promise to an advisor who drifts away, or to a friend who built the prototype and never joined, becomes a claim that surfaces during diligence, when an investor's lawyer asks whether anyone else believes they own part of the company. Clearing it then means paying, in shares or in cash, for a conversation that could have been a sentence.

Founders first

Settle the founders' split and vesting before incorporating, then paper it at formation in each founder's restricted stock agreement. Do not leave a founder's stake as an understanding while the company is incorporated around it. If there is disagreement, have it now, with the numbers in a term sheet framework rather than in a series of texts.

Everyone else

For an employee, the offer letter states the option grant in shares, subject to board approval and the plan, and the board approves it after they start. For an advisor or contractor, the advisor or consulting agreement states the grant, the vesting and the assignment of whatever they produce. Grants are approved by the board in a written consent, at an exercise price set by the current 409A appraisal, and documented in the plan's own grant paperwork. The sequence is agreement, board consent, grant notice, in that order, and a founder who keeps to it never has to explain a promise.

Write down what you told people. A short note to yourself recording what was discussed and on what conditions is worth having if memories later differ.

Written by the lawyers who built Arabella. This is legal information, not legal advice for your situation, and reading it does not make us your lawyers. For a real dispute or a high-stakes decision, talk to a licensed attorney. More questions.