Does “free equity” have the potential to be a gift you will regret accepting?
Hey, who would not want to be given some equity in a company? Especially if there does not seem to be any strings attached? If the company is successful, you benefit. If it fails, it cost you nothing. So why not accept an equity arrangement? Technically, nothing could go wrong…. or could it?
It depends.
Since individual behavior varies, so does legal advice. In this vein, let’s consider a situation where someone has given you equity in a company. You have been told that you do not have any responsibilities and you have signed nothing indicating otherwise.
“You’re okay as long as you don’t sign anything”. No. You definitely are not. The reason is there are all sorts of legal mechanisms that can establish duties, responsibilities or liabilities without signatures. Those include detrimental reliance and oral contract and/or de facto partnership. So, you do need to be careful what you communicate to people, and make very clear your intentions because your behavior within the company might determine that in fact, you do have responsibilities.
“De facto” partnership could be a significant danger. If a third-party can prove some sort of “partnership” between yourself and others behind the business, then their harms committed in furtherance of the “business” (whatever that means) can extend to you. You’d want to make sure there is an actually formed, properly documented / papered, corporate entity for the business, which makes very clear what your role is. Advisor? Silent Partner?
With all of that said, assuming there is some proper paper that properly clarifies a “No Active Role” status within the company whatsoever, then it would be really, really hard to attach liability to you personally for any debts, obligations or harms committed by the company. Notice I did not use the word “impossible,” because if any one wanted to claim you had a material or active role in the company, you would still need to defend yourself.
So, when accepting “free equity” carefully consider these two points to avoid potential trouble:
1. All roles within a business need to be documented. Even if that role is essentially “nothing”.
2. If your role truly is “Nothing”, or “Limited Advisor” or “Silent Partner”, or whatever title it is determined you will have, then your communication with others should always be demonstrative of that role. “Silent Partners” do not negotiate contracts. “Limited Advisors” do not execute all aspects of day to day business. “Nothings” do not issue checks.
Are you the beneficiary of some no-strings-attached equity in a business? Contact us today so we can ensure your good fortune does not turn into a liability.
