Traditionally, yes, but the investor insisted on clauses that were structured in a way for them to retain equity without being obligated to put in money.

Contracts have to have consideration (something of value exchanged between both parties). Get a lawyer, fight this. The existence of your company is not something you should just concede, and honestly, this should t take you down, your investor will lose. Or just form a new company, and buy the assets from the old company and move on with your life.

Might get a lawyer to kick the tires on the contract language. I mean, ianal, but that cant be legitimate, can it?

Contract: Investor gets 50% of company. Company might get money someday but no guarantees.

OP's lawyer: Sounds legit to me.

Get a better lawyer. Doesn’t sound like an enforceable contract.

I agree. Get a lawyer.

@OP: Did you have a lawyer to review the weird clause before signing it? Was it your lawyer?

Dude... Not to be a dick but you claim you have experience yet you're signing away half your company without seeing a dime and with clauses that explicitly state they don't ever have to actually pay you? None of this adds up. I have zero experience with getting funding and even I'd insist on a 10% down payment minimum. Otherwise wtf was the point of getting an investor?

There are many conditions in which this structure is entirely reasonable. However, it gets down to the investor and their track record history. I take fault for not doing due diligence and probing them. Namely:

1. Ask for references of prior companies they have funded.

2. Identity mutual contacts with someone you both know and can verify their credibility.

3. Ask around their reputation of other VCs and people in the space.

How is that structure ever reasonable? It might even be illegal or at least unenforceable on grounds that there is no consideration

https://en.m.wikipedia.org/wiki/Consideration_under_American...

This is a good point, I hope so.

When would this be reasonable? It sounds like Zero risk for the investor... promise money in the future in return for equity, if the idea flops they've lost nothing... ridiculous

The way it was structured would have allowed him tax avoidance on the investment, but also not be considered an investment but rather a silent cofounder, which would allow me to accept a low valuation without having a negative impact on the next round. Otherwise, it needs to be explained why the valuation was so low.

That still doesnt make sense. Was there no clause that said that he had to put in the money? And why is it a big deal to explain why the valuation was so low? I'm really co fused by what the reasoning was or even why you would spend time on closing this deal if, as you said, you had other term sheets lined up and have experience in this. Is there something we are missing here? Like is this not in the US or was the money desperately needed or something? The takeaway seems to be less about doing due diligence on investors and more about avoiding insane contracts- I'm still having trouble figuring out what exactly even happened. Thank you again for sharing this experience with us - I'd really love a bit more context if you wouldn't mind so I can understand the takeaways better. And in the meantime definitely get a lawyer.

Can you describe some of the scenarios where that makes any sense? Sounds bonkers to me too.

It is bonkers unless theres something not being explained.

https://en.m.wikipedia.org/wiki/Consideration_under_American...

An illusory promise does not count as consideration, and the courts would probably force the investor to pay up the money or, if there were no promises made, the co tract could be overturned on grounds of lack of consideration.

In the US, you can’t buy something without paying for it. Did you give your investor the equity as a gift?

You can’t list something for free on Craigslist? And have someone pick it up?

I believe parent comment is referring to "consideration" in the legal context commonly used in contracts to distinguish between unilateral and bilateral agreements.

https://legal-dictionary.thefreedictionary.com/consideration

https://en.wikipedia.org/wiki/Consideration

Not a lawyer, but I believe that just giving something away is not technically enforceable which is why you see 1 dollar price tags, and picking it up would count as payment if the person giving it away is trying to get rid of it, the value is kind of in the garbage disposal aspect. And its not that you cant list or pick up stuff for free, you bn obviously can, but you just might not be forming a legally enforceable contract

I’m a lawyer. This doesn’t make sense. What exactly did the clauses say? Did the “investor” make his (non) investment contingent on some types of conditions precedent that you didn’t meet? If yes, then he doesn’t have to fund his investment. But he doesn’t also get his equity. If no, then he breached and you have a claim against him.

I would not treat him as an investor and instead talk to a lawyer about putting him on notice that you’re prepared to sue him for tortious interference with your business. The other comments here about the requirement of consideration are correct. Also relevant: unjust enrichment and restitution [0]

I’m 100% speculating because you haven’t supplied enough information. The most important part of your post should be the actual language.

[0] https://en.m.wikipedia.org/wiki/Unjust_enrichment

For those wonder how something like this can happen I have a theory. It's possible the stock 'purchase' agreement didn't offer capital as consideration for equity; rather, stock would be assigned to the 'investor', and the 'investor' would 'confer' capital to the company which requires no obligation by the 'investor' to provide the capital.

People can write whatever they want in a contract, that doesn’t mean it’s enforceable, or will stand up to scrutiny in court. Contracts have to have consideration. That means there must be something of value each party gives to the other.

I looked up the word confer in a couple online legal dictionaries, and if they are reliable, then it seems the word confer means "give, accord, administer, award" etc which would be an obligation to provide capital right? I'm curious how your structure would work in detail - I imagine there must be loopholes in contract law and consideration requirements and yours sounds interesting.

Sorry to be crass here, but what kind of bullshit lawyer did you hire that let this pass?