Meaning
Legal principles require that every enforceable agreement must involve a mutual exchange of value between the parties. Legal systems apply the consideration doctrine to distinguish between a binding contract and a mere promise of a gift. This requirement ensures that both sides suffer a legal detriment or receive a benefit.
Contract Validity
Past actions do not satisfy the requirement for new promises because the value must be exchanged at the time of the agreement. When a founder attempts to issue stock based on previous work, the consideration doctrine may invalidate the transfer if no new value is provided. Legal counsel often advises the inclusion of a nominal payment or a new commitment to satisfy the rule.
This step protects the equity from future challenges by other shareholders. It ensures the contract remains valid under state law.
Bargained Exchange
Parties must intentionally trade one thing for another to create a valid link. Under the consideration doctrine, the adequacy of the value is usually not questioned by the legal system as long as it exists. A promise to perform an existing duty does not count as new value.
This distinction prevents parties from demanding more money.
Enforcement Boundary
Agreements lacking this mutual exchange are treated as nudum pactum and remain unenforceable in a legal forum. The consideration doctrine stops applying once a contract is fully performed, but it remains a barrier during the formation and modification phases. If a founder promises a bonus without a corresponding requirement for the employee, the promise may be legally void.
It remains a barrier during the formation and modification phases.
