Assigning Pre Incorporation Software Rights In Early Stage Ventures
Software created before incorporation belongs exclusively to individual authors under statutory law until formal written instruments transfer title to the entity.
covert equity contracts
Meaning
Informal promises of future ownership or equity compensation made to early contributors without proper board approval or legal documentation create deep liabilities for a growing business. Such covert equity contracts often arise during the pre-funding phase when founders lack cash but need immediate technical or design help. Because these agreements are not recorded in the company share register, they remain hidden until a financing event occurs.
This lack of transparency causes severe disputes when the organization prepares for an institutional funding round.
Informal Promise
Founders often write these agreements in casual emails or text messages, thinking they are non-binding. The existence of covert equity contracts creates a legal obligation that the company must eventually address or defend. These unrecorded commitments undermine the structured capitalization table that investors expect.
Strategic Vulnerability
Venture capitalists will often withdraw their investment offers if they discover unrecorded equity promises during legal audits. This issue creates a deadlock because the startup cannot proceed without the capital, yet the capital is blocked by the potential claims. Resolving these claims often consumes valuable time and attention.
Resolution Process
Settlements usually involve issuing fewer shares than originally promised or offering a cash payout to the claimant. This negotiation requires the company to secure a formal release of all claims before the next investment round closes. This process ensures the cap table is clean and finalized.