Sweat-Equity "Preferred" Stock

[imtcb]

What is the name of your state (only U.S. law)? Michigan

I was verbally promised 5% non-voting stake in my company roughly 5 years ago. Another employee was verbally promised 10% (which was later changed to 5% without his consent) non-voting stake in the company approximately 15 years ago. Both were witnessed by several coworkers.

Almost two years ago I was given an agreement signed by the owner for the sale of a product I developed prior to employment, including details about this stock. Here is the text of that agreement:

[HR][/HR]

The following is the agreement made between us regarding your employment and benefit program.

In return PRODUCT'S NAME to become COMPANY'S NAME product and non compete agreement. Comiision or marnin on future end user contracts to be 50/ 50..

Preferred stock equal to five percent of the owners (OWNER'S NAME) current stock shares will be issued in your name and can not be sold unless approved by myself .
This will entitle to you as a key employee of COMPANY'S NAME the following
5 percent of any dividends declared and 5% of the proceeds if the company is sold.

In return you will sign a employee non disclosure/ non compete agreement that will be required of all key COMPANY'S NAME
Key employees going forward.

I have the corporate attorney drafting up the stock documents and verifying with the companies CPA that everything is correctly done.

I am excited for both of us for this represents a major step forward for the companies future developing the team to insure COMPANY'S NAME success in the future. It would not be possible without you."

[HR][/HR]

In response to the agreement, I reduced my commission/margin from 60% to 50%, which I later reduced again to 30% so another employee could receive a 30% commission. I also signed the non-disclosure/non-compete agreement some time later. I have yet to sign the agreement and return a copy. This agreement was the first time the stock was called Preferred. When I asked about our share of profits prior to the written agreement, I was told that we would receive 5% of dividends in years when profits were over $100,000.00. The stock's PAR value is reported at $1 on the company's reports.

The owner and I had several discussions regarding the documents to transfer the product into the company's name and stock into my name, during which I was told that it was in my best interest to postpone both until the company was sold to avoid tax implications of issuing "sweat-equity" stock. A group of key employees, including myself, are in the beginning stages of purchasing the company (possibly coinciding with establishing an ESOP), but the owner has made statements insinuating that because the product was never transferred to the company I am not entitled to the 5% stake I was promised. He has also indicated that he wants the other employee's 5% proceeds to be paid out over the length of a consulting contract he will have with the company.

My questions are:
1) Are the verbal promises from 15+ and 5+ years ago binding agreements?
2a) Is the written agreement valid if I have taken the steps required of me even though I have not signed it?
2b) Is it valid if I sign it now?
2c) If it is/can be valid, is it binding in regards to the 5% stock portion even if the owner hasn't taken the other steps required of him?
2d) Since preferred stock isn't usually a calculation of a percentage of dividends or sale proceeds, but instead one using the PAR value, does the word preferred change the stated intent of his description of the stock that followed?
3) If both the verbal and written agreements are binding, does the written agreement supersede the verbal one or would it be viewed as an additional 5%? This was not clear at the time when the agreement was given to me, but the owner stated the written one would supersede in a conversation later.
4) Can the owner put a stipulation on profit requirement for dividends paid after the stake was promised?
5) The owner has not declared dividends in any year, even in years when profits were over $100,000.00. If he can put this stipulation on dividends, but doesn't follow through with it, does it invalidate the stipulation and allow us to accrue dividends for all years, allow us to accrue dividends due for those years when it should have applied, or are we out of luck completely on dividends?



Thank you for any assistant provided.

 

[tranquility]

1) Are the verbal promises from 15+ and 5+ years ago binding agreements?

You have a complex situation where you know you will need an attorney if there is any problem. I recommend one up front and get him on board before everything goes bad. That being said, I don't think either of the verbal promises are valid because of the statute of frauds. My understanding of your purported agreements is that neither can, by their terms, be completed in a year.

2a) Is the written agreement valid if I have taken the steps required of me even though I have not signed it?

This one is a bit harder. I assume the other party has signed it. If so, I suspect it can be used against him/company. If not, I think it would fail for either acceptance reasons or statute of frauds reasons. ( http://www.legislature.mi.gov/(S(rpelukx0tmafxnnhm0fxekp2))/mileg.aspx?page=GetMCLDocument&objectname=mcl-566-132 )

2b) Is it valid if I sign it now?

If he has signed it and did not put any limit on time to accept, you can accept it until the offer is withdrawn.

2c) If it is/can be valid, is it binding in regards to the 5% stock portion even if the owner hasn't taken the other steps required of him?

I'm not sure you have an agreement if you have to ask the question. But, I don't know.

2d) Since preferred stock isn't usually a calculation of a percentage of dividends or sale proceeds, but instead one using the PAR value, does the word preferred change the stated intent of his description of the stock that followed?

Both must agree on what was being discussed or there is no "meeting of the minds" (aka "agreement").

3) If both the verbal and written agreements are binding, does the written agreement supersede the verbal one or would it be viewed as an additional 5%? This was not clear at the time when the agreement was given to me, but the owner stated the written one would supersede in a conversation later.

Meeting of the minds. What was it?

4) Can the owner put a stipulation on profit requirement for dividends paid after the stake was promised?

I don't think dividends are ever required. If the Owner has the votes, he does not have to pay out dividends to anyone.

5) The owner has not declared dividends in any year, even in years when profits were over $100,000.00. If he can put this stipulation on dividends, but doesn't follow through with it, does it invalidate the stipulation and allow us to accrue dividends for all years, allow us to accrue dividends due for those years when it should have applied, or are we out of luck completely on dividends?

See above.