Hidden Employment Traps for the Business Owner: Is That Paper Napkin Agreement Legally Binding?

Consider
the following scenario: a growing family-owned 
business is looking to add professional management in the form of a
Chief Operating Officer (COO).  The
patriarch and founder of the business interviews a candidate over dinner and
drinks. He offers the job and the discussion turns to equity in the business.
The patriarch, who is a hand-shake kind of guy, scribbles "10%" on a
napkin. The COO candidate says, "deal."

Turn
the clock forward one year-the patriarch’s daughter, who manages the sales force,  is "butting heads" with the COO
over control of the business and the COO’s occasional sexist comments. She
works on  her father to dump the COO. The
patriarch is concerned with possible liability. His daughter convinces him that
it isn’t a problem because the COO has no contract, and fortunately, he was
never actually issued any stock.

This
scenario, or, at least, elements of it, occurs all the time in family-owned and
closely held businesses. It presents interesting and important questions of
employment law:       

  • Is the
    patriarch right to be concerned about liability?
  • Is the
    napkin offer of equity a binding promise? Is the COO a shareholder even though
    he was never issued any stock?
  • Is the
    COO just an at-will employee who can be let go at any time and for any reason?
  • Does it
    matter that there is no documentation of performance problems or concerns?

If you
have any questions about the information presented here, or would like to learn
more about how Prince Lobel can address any of your employment law concerns,
please contact Daniel S. Tarlow, the author of this Alert and Chair of Prince
Lobel’s Employment Law Practice Group at 617 456 8013 or dtarlow@princelobel.com, or click here to contact any of the attorneys in the
firm’s Employment Law Practice Group.