Equity disputes in AI companies rarely arise from a percentage that was split wrongly. They arise because the exit mechanism was never written down. While financing runs smoothly these questions stay dormant; once a round stalls, a key person leaves or the valuation corrects, four categories of dispute tend to surface together: founder departures, nominee shareholdings, repurchase obligations and option claims. What they have in common is that by the time the dispute exists, no further agreement can be reached in time — the only material available is the documentation and the record as it stood.
Founder departure before the agreed term
Three issues usually define the dispute: whether vested equity is subject to repurchase, how the repurchase price is calculated, and whether intellectual property and non-compete obligations travel with the person.
Repurchase of vested equity depends on whether the founder agreement or the articles provide a repurchase right and a pricing formula. Where they do not, the company has no right to compel repurchase of vested equity and may only negotiate or treat the matter as a transfer of equity. Unvested equity is dealt with under the vesting schedule, normally being recovered by the company or the holding platform without consideration.
Price is the point at which negotiations most often stall. Three formulations are common: cost price, net asset value, and the valuation of the most recent round at a discount. When the valuation corrects, the founder argues for the financing valuation while the company argues for cost price, and the gap may run to a factor of several dozen. Fixing the formula at signing is more effective than arguing about it afterwards.
Ownership of intellectual property should be dealt with independently of equity. That a founder’s work product belongs to the company ought to be reflected simultaneously in the employment contract, an inventor agreement and the records of the code repository; a constraint resting on the equity documents alone will often not withstand a claim made after departure.
Nominee shareholding
Nominee arrangements appear in AI companies in three situations: to avoid limits on the number of shareholders, where an investor prefers not to be named, and where employees hold through a nominee. Disputes tend to arise where the nominee resents the arrangement, where the nominee’s own creditors cause the shares to be frozen, or where the beneficial owner demands to be registered.
Under Judicial Interpretation No. 3 of the Company Law on the relationship between beneficial owners and nominee shareholders, a nominee agreement is valid provided it does not contravene mandatory provisions, but a beneficial owner seeking registration requires the consent of more than half of the other shareholders. A nominee agreement therefore settles who provided the money; it does not necessarily settle to whom the shareholder status belongs.
As to evidence, four categories are indispensable: proof of capital contribution, dividend records, records of attendance at and participation in shareholders’ meetings and decisions, and the original nominee agreement. Where there is a transfer record but no nominee agreement, courts will ordinarily treat the payment as a loan or other dealing.
Repurchase under a valuation adjustment
Whether a repurchase obligation can be enforced depends on the party owing it. Where the obligation is owed by the target company, Article 5 of the Minutes of the National Courts’ Civil and Commercial Trial Work Conference requires a capital reduction procedure to be completed; where it is not, the court may dismiss the claim or hold the obligation incapable of performance. Where the obligation is owed by a founder or controlling shareholder, it is a contractual obligation and more readily enforceable, subject to that individual’s ability to pay.
What is distinctive about AI companies is that the trigger is often tied to a listing or the next financing round. Whether such a condition has been satisfied turns on whether the agreement requires a qualified listing to be completed or merely an application to be submitted — the two events may be more than a year apart, and the dispute usually lies precisely there.
Option and incentive claims
Characterisation determines the route. Incentives granted on the basis of an employment relationship are generally treated as labour disputes and must first go to arbitration; purely commercial arrangements — external advisers, interests in a holding platform — are treated as contractual disputes. The grant documents, exercise notices and the exercise window agreed on departure are the decisive evidence.
Three disputes are common: whether an exercise right survives departure, whether the exercise price has been adjusted as agreed, and whether the company may refuse to effect the industrial and commercial registration. Where interests are held through a nominee on a holding platform, a further layer is added: whether the employee sues the platform or the company depends on the counterparty to the agreement.
Four steps once a dispute has begun
First, preserve the evidence. Shareholders’ resolutions, proof of capital contribution, nominee agreements, chat records, correspondence and code commit records should be arranged chronologically, rather than assembled after the other side makes a move.
Second, determine jurisdiction. Disputes over incorporation, confirmation of shareholder status, distribution of profits and dissolution fall to the court of the company’s domicile; where the agreement contains an arbitration clause, its validity and whether it covers the dispute in question should be established first.
Third, assess preservation. Where a risk arises that equity will be transferred or frozen, an application for property preservation is more urgent than the substantive claim itself.
Fourth, distinguish negotiation from litigation. Most equity disputes end not in judgment but in repurchase or transfer. The value of the equity and the cost of proceedings should be quantified before deciding whether to commence them.
Frequently asked questions
Q: Once a founder leaves, can the company simply recover his equity? A: Only the unvested portion. Vested equity must be dealt with under the repurchase right and price agreed in the documents; absent agreement, it cannot be recovered compulsorily.
Q: Where a nominee agreement has been signed, can the beneficial owner demand registration directly? A: Not directly. The consent of more than half of the other shareholders is required; otherwise the beneficial owner may only assert contractual rights against the nominee, or bring proceedings to confirm status before applying for registration.
Q: If a repurchase clause names the company as obligor, will a claim actually recover the money? A: There is an obstacle to performance. A repurchase by the target company requires a capital reduction procedure, and where that has not been completed the courts will generally not order direct performance. A founder repurchase should be agreed at signing as the alternative route.
This article is prepared on the basis of the Company Law (as revised in 2023), Judicial Interpretation No. 3 of the Company Law, the Civil Procedure Law and the Minutes of the National Courts’ Civil and Commercial Trial Work Conference. For assistance with an equity dispute or with dispute resolution generally, please contact Geason Law Offices.