Startup promised me 2% equity as employee #3 but never issued the shares - company just got acquired

I joined a startup in 2022 as employee #3. During negotiations, the CEO verbally promised me 2% equity and sent an email confirming "2% equity stake vesting over 4 years." I accepted a below-market salary of $85k (market rate was $130k+) specifically because of this equity promise.

I worked there for 3 years, helped build the product from scratch. The company was just acquired for $40M.

Here's the problem: they never actually issued me any stock options or shares. No option agreement, no 409A valuation, nothing. Now the CEO is saying the equity "was never formalized" and I'm not entitled to anything from the acquisition.

I have the email promising 2% equity. Is this enforceable? What are my legal options? I'm in California and the company is a Delaware C-corp.

Startup/VC attorney here. This is unfortunately more common than it should be. The good news: you have that email, and California has strong protections for situations like this.

You potentially have several claims:

• Breach of contract: The email could constitute a written agreement or evidence of an oral contract
• Promissory estoppel: You relied on the promise to your detriment by accepting below-market salary
• Fraud/misrepresentation: If they never intended to issue the shares
• Unjust enrichment: They benefited from your labor without providing promised compensation

The fact that they never did a 409A valuation or issued formal option agreements doesn't mean you have no rights - it means they failed to fulfill their obligations.

This is why EVERYONE needs to get equity agreements in writing with proper documentation before starting work. I'm a founder myself and I would never promise equity without immediately following up with paperwork from our lawyers.

That said, the CEO here is in the wrong. An email promising 2% equity is pretty clear, even if the formal docs were never done. The CEO was responsible for handling that paperwork, not you.

@StartupLawyer_SV thank you, that's helpful. A few follow-up questions:

1. What's the statute of limitations on these claims? I'm worried I waited too long.

2. Is it worth trying to settle directly with the CEO or should I go straight to a lawyer?

3. The acquisition is supposed to close in 30 days - does that change anything?

I went through almost this identical situation last year. Different company, same story - promised equity, never formalized, acquisition happened.

Here's what worked for me: I got a lawyer, sent a demand letter threatening to file suit and potentially hold up the acquisition closing. The acquiring company does NOT want litigation clouds on a deal - it creates risk and complicates their due diligence.

They settled for about 60% of what I was owed to make it go away quickly. Not ideal but better than nothing and way faster than litigation.

To answer your questions:

1. Statute of limitations: In California, breach of written contract is 4 years, oral contract is 2 years. Fraud is 3 years from discovery. Since the acquisition just happened and that's when you discovered you weren't getting anything, you should be within the window. But act quickly.

2. Direct settlement vs lawyer: Given the amount at stake (2% of $40M = $800,000), you absolutely need a lawyer. This is not a DIY situation. Look for attorneys who specialize in startup equity disputes - some work on contingency for cases like this.

3. The 30-day timeline: This is actually leverage in your favor. @ExitVictim2023 is right - acquirers hate pending litigation. A well-timed demand letter could accelerate settlement discussions significantly.

Former startup CFO here. Quick reality check: 2% of $40M is $800K on paper, but you need to understand the cap table dynamics. If they raised money, there's likely been dilution. Your 2% might be worth less depending on share class and preferences.

More importantly - in most acquisitions, common shareholders (which is what your options would have converted to) often get paid last after preferred shareholders and debt. Depending on deal structure, 2% of common might not actually be worth $800K.

None of this means you don't have a claim. Just want you to have realistic expectations when negotiating.

@TechCFO_retired good point. I know they raised a Series A ($5M at $20M valuation) and Series B ($12M at $50M valuation). So yeah, there's been dilution. I'm guessing my 2% would have been diluted to maybe 1.2-1.5% by now?

Also just found another email where the CEO said "your equity will be options, we'll get the paperwork done once we close the seed round." That was in 2022. They closed the seed round and still never did the paperwork.

Work in VC and see stuff like this occasionally during due diligence. The acquiring company's lawyers will 100% find this if you assert your claim. They'll see the email chain, see no corresponding option grant in the cap table, and flag it as a risk.

Smart acquirers will either require the seller to resolve it pre-close or set aside escrow funds for potential claims. Either way, making noise now while the deal is pending gives you leverage.

Since the company is a Delaware C-corp, Delaware law will govern corporate matters. But your employment claims (promissory estoppel, fraud) would likely be governed by California law since that's where you worked.

California is generally more employee-friendly. Also worth noting: California Labor Code Section 2751 requires employers to put commission/bonus agreements in writing. Equity compensation might fall under similar protections.

That second email is gold. "We'll get the paperwork done once we close the seed round" is an explicit acknowledgment of the obligation and a promise to formalize it. They closed the round and didn't follow through - that's breach.

Gather all documentation: offer letter, all emails mentioning equity, any Slack messages, any witnesses who heard discussions about your equity. Build your evidence file before reaching out to a lawyer - it'll save you money on legal fees.

Not a lawyer, but I had a similar situation that resolved differently. In my case, the CEO genuinely forgot to do the paperwork (small team, no HR, things slip through cracks). When I raised it, they immediately issued me backdated options.

Have you tried having a direct conversation with the CEO before going legal? Sometimes it's honest incompetence, not malice. Obviously if they refuse, then lawyer up.

@SarahK_startup I did try talking to him first. His exact words were "look, we never got around to the paperwork, so legally you don't have any claim to equity. Sorry, but that's just how it is." He was pretty dismissive about it.

I've started reaching out to attorneys. Found a few who specialize in startup equity disputes. One is offering a free consultation tomorrow.

"Legally you don't have any claim" - that's nonsense and he knows it. The email IS the legal claim. He's just hoping you'll give up.

Good luck with the attorney consultation. Make sure to ask about contingency fee arrangements - many employment lawyers will take strong cases like this on contingency (they get paid only if you win/settle).

OP - any update on the attorney consultation? This is a valuable thread for others in similar situations.

Update: Hired an attorney who specializes in startup equity disputes. She sent a demand letter to the company and CC'd the acquiring company's legal team.

Within 48 hours, I got a call from the CEO's lawyer wanting to "discuss resolution." They're suddenly very interested in settling before the acquisition closes.

We're negotiating now. They started at $150K, my lawyer countered at $600K (accounting for dilution - she calculated my stake would be worth about $480-550K). Currently going back and forth.

The acquiring company apparently told them to "clean this up" before closing. Leverage is real.

Final update for anyone following this thread:

Settled for $425,000. After attorney fees (33% contingency), I walked away with about $285K. Not the full $500K+ I might have been entitled to, but far better than the $0 the CEO was offering.

The acquisition closed in December. Settlement was part of the closing conditions.

Lessons learned:

• ALWAYS get equity agreements in writing with formal option grants
• Keep every email, Slack message, and document related to compensation
• Don't accept "we'll do the paperwork later" - no paperwork, no start date
• If you're in this situation, get a lawyer ASAP, especially if there's a liquidity event pending

Thanks everyone for the advice. This thread helped me understand I had real legal options.