You’re talking with a friend about a new business idea you’ve been thinking about. After you’ve explained the business model, your friend says, “I really think that’s a good concept and I’d like to be involved!” You and the friend talk further and discuss more details about how to start the business, including an understanding that you will manage the business and your friend will be an investor.  Then your friend says, “I’d like to finance the business in return for an agreed-upon ownership percentage and an agreed-upon percentage of the profits.” You reply that it will take a certain amount of money to fund the start-up costs and your friend says, “That sounds good, when do we start?” You say, “As soon as you send me the money.”

Have you and your friend formed a binding contract? The answer is: NO. There is no binding contract until the money has changed hands (the “Consideration”) One of the essential elements of forming a Contract is missing. However, if your friend gives you the money and you accept it, there is a binding contract, even though nothing is in writing. A verbal contract is enforceable if all required elements are met.

The “must have” items are:

  • Offer, An offer that encompasses the duties and responsibilities of each party
  • Acceptance, Acknowledgement, and agreement to the terms
  • Awareness, Mutual understanding by each party
  • Consideration, The exchange of something of value
  • Capacity, Each party must be sane/unimpaired
  • Legality, the agreement can’t be illegal.

The nature of human memory is selective and different people will remember conversations differently. It may be hard to believe that your lawyer is trying to simplify things, but my advice is this:

When discussing an agreement, clearly describe, explain and define all terms up front and PUT IT IN WRITING IMMEDIATELY, after getting advice from your trusted attorney!

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