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In the following scenario, does the individual have a legal case against the company? And if so, what law specifically can be applied?

Summary

A company offers x% equity. The individual engages. The company stalls, eventually offering "x% of profits during employ". The company has acted unethically and cheated the individual, but does the individual have legal recourse?

Details

  • A US company (Delaware) engages an individual (UK citizen) to manifest the core technology in exchange for a wage plus x% equity. The CEO projects the value of this equity to be eventually several million dollars.

  • The company stalls on presenting a full legal contract, stating that the internal structure is in flux, presenting instead an interim contract which the individual signs, which makes no mention of equity.

  • The individual commences work, bringing great value to the company.

  • After six months the company finally produces a full legal contract. It offers x% of profits made by the company within the duration of employ. This is absolutely different from x% equity.

  • The individual complains that this is clearly of considerably lesser value (orders of magnitude) from what was offered. First a product must be built. Only then can it be sold. The company has cheated the individual.

  • The investor who initially said "Don't worry, we will not hold you to your stake" now says "We have decided only to reward those that are actively contributing". When challenged (on Slack) for reneging directly upon his word, he remains silent.

  • The CEO says "We can only offer this "phantom" equity due to the way the company has been structured. This is the offer now, take it or leave it. We plan to revise the company structure later."

  • Over the next 18 months, the individual continues to develop the core technology, while refusing to sign any contract that mentions this "phantom" equity.

  • By the end of this period almost the entire technical wing of the company is composed of hires made by the individual. The individual has made a brilliant sequence of moves that would not otherwise have been made, sourcing / hiring developers in capacities in such a way as to guarantee the future of the company's product.

  • Eventually the individual disengages. No revision has occurred. It seems clear that the company has no intention to honour the initial offer. And the product will now succeed. There is no incentive to continue.

Evidence

  • Initial email correspondence between individual and CEO making clear that the offer is for 2.5% equity

  • Verified download of all company communication through Slack privy to the individual, demonstrating:

    • repeated attempts by the individual for the company to honour their promise
    • Evasive behaviour from the CEO
    • The investor simply disconnecting from the discussion upon being challenged
  • Contract revisions proffered by the company

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does the individual have a legal case against the company?

Unfortunately, no. Some details and terms you use are unclear (e.g., "phantom" equity, "manifest" core technology, and so forth), but your overall description reflects that the individual sabotaged himself by signing a contract that does not mention the promise of equity through which he was persuaded to engage.

A written contract usually supersedes any prior agreement --regarding the subject matter of that contract-- between the parties. That superseding effect means that the contract formalizes or overrides, accordingly, said agreements or promises. Since the initial promises of equity are not reflected in the "interim" contract, the investor's subsequent silence upon individual's reproach/reminders is from a legal standpoint irrelevant. At that point only the terms of the contract matter.

The individual might consider alleging mistake in the sense of Restatement (Second) of Contracts at § 151-154 such that would make the contract voidable and perhaps "make room" for other theories of law. However, that seems futile unless the interim contract contains language that (1) provides specific conditions for its expiration, or (2) reflects the company's [mis-]representations that induced the individual to sign it. Neither seems to have occurred in the situation you describe.

There is always a possibility that the contract might favor the individual's position and he just has not noticed it. But the only way to ascertain that is by reading the contract itself.

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  • Thank you for this extremely informative answer. The case is a little deeper than I have presented (I suspect SE would not be the right platform to present the entire situation). The company placed the individual in a situation that required them to sign the profit contract in order to release payment that was necessary for the individual to purchase an air ticket to leave the USA. The individual was faced with the choice: Either sign the contract or violate the US Visa. There may be an argument for exploitation that signing represented submission rather than consent. – P i Mar 13 at 4:25
  • Might you be interested to look into this further? I can't find any way to contact you. If this is by design, my apologies. Otherwise might you be willing to reach out to me at pi | pipad | org? I'm not seeking a free lunch. At the core of this saga is a sharing of profits. A couple of individuals have violated their word. I honour mine. And I would be honoured to collaborate with a Reverse Engineer. – P i Mar 13 at 4:30
  • @Pi My email address is in many of the court filings I have uploaded on my blog. I can contact you if you want, but always keep in mind that I am not a lawyer and therefore this does not constitute attorney-client relationship whatsoever. I just addressed your other question since it might help others as well. – Iñaki Viggers Mar 13 at 12:11
  • I would be most grateful if you would care to contact me by email (I couldn't find yours even with the hint). I omitted details in both my questions to favour abstraction (Netiquette), but it seems there may be a case here. – P i Mar 14 at 4:00
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It would not be grounds to sue if it is not in writing. However the company may be sued for misleading statements or anything improper they did. It would be a fraud case if they claimed that they were going to offer equity but could not present a contract for administrative reasons. Keep any emails or communications where they suggested equity would be offered.

Also, look into discrimination law. If the employer acted in a discriminatory way this is clear grounds to sue.

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  • Given the inaccuracies in your answer, you might want to cite your sources so we can identify the misunderstanding. There is generally no requirement that a contract be in writing for a contract lawsuit to proceed. Being in writing and signed just makes it much harder for an affected party to obtain any relief not established in the contract. The contract overrides prior promises. Checking discrimination law needlessly distracts the OP from the real issue: The company took advantage of both individual's technical expertise and lack of notions of law in a way that he forfeited legal remedies. – Iñaki Viggers Mar 11 at 8:59

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