Is Equity in an Offer Letter Binding in Minnesota?

When Does an Equity Promise to a Recruit Become a Binding Contract?

An equity promise can bind as a contract only if its terms let a court tell what the company owes and whether it delivered, such as the type of award, the number of shares or units, the price, and the vesting conditions. In Martens v. Minnesota Mining & Manufacturing Co., 616 N.W.2d 732 (Minn. 2000), the Minnesota Supreme Court said it requires “language that is sufficiently definite for a court to discern with specificity what the provision requires of the employer.” Definiteness is the first part of the test the court applied: “1) did the employer make an offer definite in form; 2) did the employer communicate that offer to the employee; 3) did the employee accept the offer; and 4) did the employee furnish consideration.” Because the 3M statements failed the first part, the court wrote, “we need not reach the issues of communication to the offeree, acceptance of the offer, and consideration given by the offeree.”

Martens involved statements used in recruiting. The 3M program at issue was “designed and developed by appellant in the 1950’s to recruit and retain technical employees,” and two long-term technical employees claimed its brochures and their managers’ statements promised pay and promotion equivalent to the management track. The court accepted their allegations as true for the motion and still dismissed the contract claim, finding “There is no suggestion that an individual will be entitled to a specific pay, benefit level, or condition of employment.” It repeated its earlier conclusion that “not every utterance of an employer is binding.”

The court drew the line at measurable terms. It wrote that “While pay or promotion based upon time on the job, units of production, meeting sales objectives and the like are determinable and a breach identifiable,” the program’s promises of equivalence were not. Whether a statement is definite enough to be an offer, the court said, “is a question of law to be resolved by the court.” A recruiting pitch that offers only a real stake in the company has the generality Martens rejected; an option count with a price and a time-based vesting schedule resembles the determinable terms the court contrasted.

A recruit’s own reading of the pitch does not supply the missing terms. In Spanier v. TCF Bank Savings, 495 N.W.2d 18 (Minn. App. 1993), the bank’s letter to a recruited lending officer “confirmed a salary of $4,416 per month, three weeks vacation, and promised a review after 12 months.” He later claimed a promise of long-term employment, and the Court of Appeals reversed his jury verdict, noting “His claims were based on his subjective belief and his own inferences that TCF Bank’s commitment to the commercial lending business would provide him job security.”

How Can a Recruit Enforce an Equity Promise Without a Contract?

A recruit with no enforceable contract can still enforce a promise through promissory estoppel, which “requires proof that 1) a clear and definite promise was made, 2) the promisor intended to induce reliance and the promisee in fact relied to his or her detriment, and 3) the promise must be enforced to prevent injustice,” as Martens restated the Minnesota rule. The first element is where general recruiting talk fails: the court held the 3M program’s description “is not a promise sufficiently clear and definite to be enforceable.”

The Minnesota Supreme Court applied the doctrine to a recruit in Grouse v. Group Health Plan, Inc., 306 N.W.2d 114 (Minn. 1981). Group Health offered a pharmacist a job by phone; he accepted, gave notice to his employer, and turned down another offer, and Group Health then hired someone else before he started. Because either side could end at-will employment, the court found no contract, but it applied promissory estoppel, whose “effect is to imply a contract in law where none exists in fact.” The court reasoned that “Group Health knew that to accept its offer Grouse would have to resign his employment at Richter Drug,” and concluded: “Under these circumstances it would be unjust not to hold Group Health to its promise.”

Grouse involved a pharmacist job, not equity, but a promise of ownership is judged by the same elements. In Olson v. Synergistic Technologies Business Systems, Inc., 628 N.W.2d 142 (Minn. 2001), the claimant sued “to enforce Cameron’s alleged promise to give her an ownership interest in Syntech,” a company its founder later sold. Her facts were unusual: she had a personal relationship with the founder and worked without pay before joining the payroll. After trial, “the district court found that Olson failed to prove any element of either estoppel count, but the court invoked its equitable powers to award Olson a $60,000 judgment.” The court of appeals reversed that award, and the Minnesota Supreme Court affirmed the court of appeals. My page on promissory estoppel in Minnesota covers the doctrine beyond employment.

What Does a Recruit Recover if You Withdraw the Offer?

Under Grouse, a recruit who relied on a firm offer of at-will employment, by resigning a job and declining another offer, as Grouse did, can recover through promissory estoppel when its elements are met. On its facts, the court measured that recovery by what the recruit lost rather than what the new job would have paid. The court wrote that “Relief may be limited to damages measured by the promisee’s reliance,” and that “the measure of damages is not so much what he would have earned from respondent as what he lost in quitting the job he held and in declining at least one other offer of employment elsewhere.”

The court tied that measure to the nature of the job: “Since, as respondent points out, the prospective employment might have been terminated at any time,” expected earnings were not the measure. It also limited its holding. “The conclusion we reach does not imply that an employer will be liable whenever he discharges an employee whose term of employment is at will.” Grouse had “resigned the position he already held in reliance on the firm offer which respondent tendered him.”

For an employer, Grouse points to the facts that set the exposure. I suggest learning what a candidate is giving up at the current job before an offer that includes equity goes out, because Grouse measures the loss by what the candidate lost in quitting and in declining other offers.

How Does Minnesota’s False-Inducement Statute Apply to Equity Promises?

Minnesota makes it unlawful to induce a person to move for work by knowingly false statements about the job’s pay. Minn. Stat. § 181.64 reaches a company “doing business in this state, directly or through any agent or attorney” that induces a person “to change from one place to another in this state, or to change from any place in any state, territory, or country to any place in this state, to work in any branch of labor through or by means of knowingly false representations, whether spoken, written, or advertised in printed form, concerning the kind or character of such work, the compensation therefor.” Equity offered as part of a job’s pay can fall within “the compensation therefor.”

Three limits in that text matter. The representation must be “knowingly false,” so the statute turns on what the speaker knew when speaking. The recruit must have changed location, into Minnesota or from one place to another within it. And the statute reaches statements made through agents, such as a recruiter or hiring manager speaking for the company.

The remedies are in Minn. Stat. § 181.65. A violation is a misdemeanor. The person induced “shall have a right of action for the recovery of all damages sustained in consequence of the false or deceptive representations, false advertising, or false pretenses used to induce the person to enter into or change a place of employment,” and “shall have the right to recover such reasonable attorney fees as the court shall fix, to be taxed as costs in any judgment recovered.” I suggest giving everyone who recruits for the company the exact equity language approved for each role, because the statute holds the company responsible for statements made “directly or through any agent or attorney.”

A common-law fraud claim on a broken equity promise faces a higher bar. Martens, quoting an earlier decision, explained that for a representation about future acts, “it must be made affirmatively to appear that the promisor had no intention to perform at the time the promise was made.”

How Does the Statute of Frauds Apply to an Oral Equity Promise?

The statute of frauds may not protect an employer from an oral equity promise, because Minnesota has two provisions that point in different directions. Minn. Stat. § 513.01 provides that “No action shall be maintained, in either of the following cases, upon any agreement, unless such agreement, or some note or memorandum thereof, expressing the consideration, is in writing, and subscribed by the party charged therewith.” Its first case is “(1) every agreement that by its terms is not to be performed within one year from the making thereof.”

Minnesota’s version of the Uniform Commercial Code article on securities says the opposite for one class of contracts. Minn. Stat. § 336.8-113 provides: “A contract or modification of a contract for the sale or purchase of a security is enforceable whether or not there is a writing signed or record authenticated by a party against whom enforcement is sought, even if the contract or modification is not capable of performance within one year of its making.” And Grouse shows that promissory estoppel can enforce a promise where no contract exists at all.

I suggest treating every equity statement made to a recruit as one the recruit may try to enforce, because a writing defense may not be available to the company. My page on Minnesota’s statute of frauds covers the other categories that section lists.

Who Has Authority to Grant Equity in a Minnesota Corporation or LLC?

In a Minnesota corporation, the board authorizes every issuance of shares and options, so an officer’s signature on an offer letter does not by itself create them. Under Minn. Stat. § 302A.401, subd. 1, “(a) Subject to any restrictions in the articles, a corporation may issue securities and rights to purchase securities only when authorized by the board.”

Four related rules shape a recruiting grant in a corporation:

1. Options are rights to purchase. Minn. Stat. § 302A.409, subd. 1, defines the term to include a right “entitling a person to subscribe to, purchase, or acquire securities of a corporation, whether by the exchange or conversion of other securities, or by the exercise of options, warrants, or other rights, or otherwise, but excluding preemptive rights.”
2. The board or its delegate sets option terms. Under subdivision 3, a corporation may issue options after their terms, “including the conversion basis or the price at which securities may be purchased or subscribed for, are fixed by the board, or by an officer pursuant to board authorization, subject to any restrictions in the articles.”
3. Option terms must be written. Under subdivision 4, “The instrument evidencing the right to purchase or, if no instrument exists, a written agreement, shall set forth in full, summarize, or incorporate by reference all the terms, provisions, and conditions applicable to the right to purchase.”
4. Shares for services need a board resolution. Minn. Stat. § 302A.405, subd. 1, allows shares to be issued for “services rendered to the corporation or to be rendered to the corporation, as authorized by resolution approved by the affirmative vote of the directors required by section 302A.237,” with an alternative where the articles call for a shareholder vote.

Existing shareholders may also have a claim on new shares. Under Minn. Stat. § 302A.413, subd. 1, “Unless denied or limited in the articles or by the board pursuant to section 302A.401, subdivision 2, clause (b), a shareholder of a corporation has the preemptive rights provided in this section.” Subdivision 2 defines that right as one “to acquire a certain fraction of the unissued securities or rights to purchase securities of a corporation before the corporation may offer them to other persons.” Subdivision 4(c) exempts securities “issued pursuant to an employee or incentive benefit plan approved at a meeting by the affirmative vote of the holders of a majority of the voting power of all shares entitled to vote” unless the articles provide otherwise. Subdivision 4 also provides that “Unless otherwise provided in the articles, a shareholder does not have a preemptive right pursuant to this section to acquire securities or rights to purchase securities that are: (a) issued for a consideration other than money” or “(d) issued upon exercise of previously issued rights to purchase securities of the corporation.” I suggest checking the articles and the plan’s approval before promising shares to a recruit, because subdivisions 1 and 4 both turn on what the articles provide.

A Minnesota LLC admits a recruit as a member under Minn. Stat. § 322C.0401, subd. 4, which for an existing company means “(1) as provided in the operating agreement” or “(3) with the consent of all the members,” among other routes that do not fit a hire. I suggest reading the operating agreement before an LLC promises units, because without a provision on admitting members, every member’s consent is the route the statute offers.

What Securities Rules Apply When You Grant Equity to an Employee?

Granting shares or options to an employee involves an offer or sale of a security, so it must fit a registration exemption under both Minnesota and federal law. Minn. Stat. § 80A.49 provides that “It is unlawful for a person to offer or sell a security in this state unless” the security is a federal covered security, is registered, or meets this condition: “(2) the security, transaction, or offer is exempted from registration under sections 80A.45 through 80A.47.”

The Minnesota exemption for employee equity is in Minn. Stat. § 80A.46, clause (21), which covers “(21) employees’ stock purchase, savings, option, profit-sharing, pension, or similar employees’ benefit plan, including any securities, plan interests, and guarantees issued under a compensatory benefit plan or compensation contract, contained in a record, established by the issuer, its parents, its majority-owned subsidiaries, or the majority-owned subsidiaries of the issuer’s parent for the participation of their employees including offers or sales of such securities to: (A) directors; general partners; trustees, if the issuer is a business trust; officers; consultants; and advisors.” It has a filing step: “A person establishing an employee benefit plan under the exemption in this clause (21) must provide to the administrator notice of the transaction by filing a written description of the transaction along with a consent to service of process complying with section 80A.88. Notice must be filed at least ten days in advance of any transaction or such shorter period as permitted by the administrator.” I suggest building that filing into the grant calendar, because the clause requires it before the transaction.

The federal exemption written for a private company’s employee grants is SEC Rule 701, 17 C.F.R. § 230.701. It is “available to any issuer that is not subject to the reporting requirements of section 13 or 15(d) of the Securities Exchange Act of 1934” “and is not an investment company registered or required to be registered under the Investment Company Act of 1940.” It covers offers and sales “under a written compensatory benefit plan (or written compensation contract) established by the issuer, its parents, its majority-owned subsidiaries or majority-owned subsidiaries of the issuer’s parent, for the participation of their employees, directors, general partners, trustees (where the issuer is a business trust), officers, or consultants and advisors.” For consultants and advisors, see the rule’s “Special requirements for consultants and advisors” at 17 C.F.R. § 230.701(c)(1). The rule “exempts offers and sales to former employees, directors, general partners, trustees, officers, consultants and advisors only if such persons were employed by or providing services to the issuer at the time the securities were offered.” Four of its terms bear on recruiting:

• The plan goes to the recipient. “The issuer must deliver to investors a copy of the compensatory benefit plan or the contract, as applicable.”
• Options count when granted. Under the rule’s limits on amounts sold, “sales of securities underlying options must be counted as sales on the date of the option grant.”
• State law still applies. “In addition to complying with this section, the issuer also must comply with any applicable state law relating to the offer and sale of securities.”
• Antifraud rules still apply. “These transactions are not exempt from the antifraud, civil liability, or other provisions of the federal securities laws.”

Minnesota has its own antifraud section: Minn. Stat. § 80A.68 makes it unlawful “in connection with the offer, sale, or purchase of a security, directly or indirectly” for a person “to make an untrue statement of a material fact or to omit to state a material fact necessary in order to make a statement made, in the light of the circumstances under which it is made, not misleading.”

The written-plan requirement in Rule 701 and the written-terms requirement in § 302A.409 point the same way: the recruit should receive the documents that actually govern the grant. My page on securities traps in phantom equity plans covers a related structure.

How Should an Offer Letter Describe Equity?

An offer letter should state the award’s type, number, price, and vesting, say that the grant is subject to board approval and to the plan and award agreement, and arrive with those documents, so the promise the recruit relies on matches the grant the company makes. Each of the following steps rests on a rule above:

1. Measurable terms. I suggest stating the number of shares or units, the exercise price for options, and the vesting schedule, because Martens called pay terms tied to measures like time on the job “determinable and a breach identifiable” and treated general statements as policy. Under 26 U.S.C. § 422(b)(4), an option is an incentive stock option only if “the option price is not less than the fair market value of the stock at the time such option is granted.” For a nonstatutory option, see the Treasury regulation at 26 C.F.R. § 1.409A-1(b)(5)(i)(A)(1) and (b)(5)(vi)(B).
2. The approval condition. I suggest stating that the grant is subject to board approval (or the approval the operating agreement requires), because § 302A.401, subd. 1, reserves issuance to the board.
3. The governing documents. I suggest delivering the plan and award agreement before the candidate accepts, because Rule 701 requires delivering the plan and § 302A.409, subd. 4, requires the option’s terms in writing. In one recruited executive’s offer package I analyzed, the offer letter promised equity, but the grant notice sent every termination question to an incentive plan the executive had not read.
4. Conditions in writing. In another recruited executive’s agreement I analyzed, the equity was a promise to grant on a future date. The grant would happen only if the executive was still employed, the LLC’s manager approved, and the executive signed grant documents that did not exist yet. The percentage would be measured on a fully diluted basis at that later date, and the plan then in effect would control. Conditions like those are the company’s to set, and writing them into the agreement puts them in the terms a court reads.
5. One controlling document. That same agreement stated that it replaced any offer letter for the role. I suggest saying which document controls, because the recruit and the company should be reading the same terms; my page on when an offer letter and a later agreement conflict covers the dispute that follows when they differ.
6. Departure terms. I suggest stating in the award agreement what happens to unvested and vested equity when employment ends; see forfeiture terms for unvested equity and what happens to options when an employee is fired.
7. No noncompete. Under Minn. Stat. § 181.988, subd. 2, “(a) Any covenant not to compete contained in a contract or agreement is void and unenforceable,” and “(c) Nothing in this subdivision shall be construed to render void or unenforceable any other provisions in a contract or agreement containing a void or unenforceable covenant not to compete.” Subdivision 2(d) adds that “a court may award an employee who is enforcing rights under this section reasonable attorney fees.” Subdivision 1 provides that “A covenant not to compete does not include a nondisclosure agreement, or agreement designed to protect trade secrets or confidential information,” and it also excludes “a nonsolicitation agreement,” so I suggest using those instead, as explained in the protections that survive Minnesota’s noncompete ban.

Making Equity Offers You Intend to Keep

A Minnesota company can recruit with equity and still control what it owes, if the promise is definite, approved, and documented before the recruit relies on it. General statements promising equivalent pay and promotion did not bind the employer in Martens, but under Grouse a firm offer a recruit relied on by resigning a job can bind through promissory estoppel when its elements are met. A knowingly false statement about pay that induced a recruit to move for the job can bring damages and attorney fees under § 181.65. Board or member approval, the written plan, and the securities exemptions decide whether the company can deliver the grant it described. For related topics, see my Minnesota employment law page for employers. If you are preparing an offer that includes equity, you can email me at [email protected] with a brief description of the role and how the company is organized, and I can start an intake and conflict check before you send any confidential documents.