Settling shareholder disputes through shares

We've seen an uptick in our practice of disputes between founders, or disputes between consultants and early stage Companies. Many of these disputes involve the number of shares that each party thinks is "fair" for service that has been provided.

In startups, cash tends to be more precious than equity, although later in a Company's lifetime the opposite becomes true. Still, with cash an almost sacred commodity, a Company can consider solving these disputes through issuance of equity. There's nothing wrong with settling a dispute and providing equity to people who may have claims against the Company.

In doing so, however, a Company should still make sure that it is complying with securities rules when it issues shares, particularly if it has not issued shares in the past to the other party, or is relying on a different exemption to do so. Companies are still required to comply with securities rules even if they are using shares to settle a case, instead of to raise finance.

Individuals who are receiving equity from a Company should do all necessary tax diligence to avoid phantom tax with respect to the value of the equity they are receiving. 

Of course, avoiding a dispute is best. Companies and individuals can do this by putting everything in writing and making sure that discussions about equity are crystal clear. This is easier said than done; but, assuming a professional resolution, a small amount of equity to restore harmony (and more importantly to obtain a release of claims and preserve intellectual property) isn't the end of the world.