In June 2025, New York Venture Hub published “The Forfeited Equity Trap: Why Your Non-Compete Might Be Worthless”.  In that post, I blogged that the Delaware Court of Chancery’s decision in North American Fire Ultimate Holdings, LP v. Doorly served as a cautionary tale that an equity-based non-compete could become unenforceable if the equity supporting the restrictive covenant was forfeited upon termination of the employee for cause. At the time, the Chancery Court held that because the incentive units were the sole consideration for the restrictive covenants, their automatic forfeiture left nothing supporting enforceability.

Delaware Supreme Court Reverses

Fast forward to February 3, 2026, and the Delaware Supreme Court just reversed that reasoning in a unanimous opinion, holding that consideration for restrictive covenants must be evaluated at the time the contract is formed, not at the time of enforcement.  If the equity consideration was valid at formation, the restrictive covenant remains enforceable even if the equity is forfeited.

This ruling answers a critical question for venture-backed companies and private equity sponsors: Does the automatic forfeiture of equity negate the enforceability of non-competes and related restrictive covenants? Under Delaware law, the answer now evidently is “no”, provided that the incentive equity served as valid consideration at the time the employee agreed to the restrictive covenants.

The Delaware Supreme Court’s logic is that contract doctrine measures consideration at the time of contract formation, not at the point of enforcement.  It found that a contingent equity interest (even one subject to vesting and future forfeiture) confers a benefit when granted and thus supports enforceability, and that the Chancery Court erred by retroactively erasing consideration simply because the employee forfeited the equity later.

What this Means for Employers and Investors

The new ruling materially changes the risk calculus that formed the basis for my earlier post. The “forfeited equity trap” is not dead, just reframed.  The original caution remains viable: if equity is the only thing backing a non-compete, but that equity had no value at the time of formation, the restrictive covenant may be unenforceable.

So the focus now turns to whether the equity constituted value at the time of formation, and I could think of four theories that could be relied upon to argue that an equity grant failed to constitute valid consideration at formation because it lacked legal value at the time.

The first is if the grant is illusory because the employer retains unfettered discretion. If the employer can cancel, claw back or amend the equity grant at will, without any triggering condition or standard such as competition or termination for cause, then the equity may be considered illusory and thus of no value. This might be the case when the underlying equity plan permits the company to rescind unvested (or even vested) equity at its “sole discretion” for any reason.  Another example might be if the employer retains unilateral power to amend the restrictive covenant or equity terms without employee consent. Or if vesting is entirely discretionary and not tied to objective service or performance conditions. In these circumstances, the employee has received no enforceable right at formation, only a revocable expectancy.

Another argument could be that the equity was issued ultra vires, without authority.  This would be the case if the equity was never validly issued. For example, if there was no board approval for the grant, or if there was insufficient authorized shares in the certificate of incorporation.

Yet another theory for attacking the existence of value is that the equity was worthless at the time of grant as a legal matter, not just because of economically low value.  Delaware courts do not require substantial value, only legal sufficiency. However, consideration may fail where the equity was issued by an entity that was already dissolved or insolvent with no residual value and no reasonable prospect of value. Or the equity interest is subject to senior liquidation preferences that mathematically eliminate any possible recovery, and this structure was known at formation.

A final argument could be that the equity was not actually bargained for.  Consideration must be part of the exchange. But problems arise where the equity was granted before the restrictive covenant was agreed to, and the covenant was added later without new consideration.  Or the equity was already fully vested and earned before the covenant was imposed. Or perhaps the employee was already contractually entitled to the equity, and the covenant was added as a unilateral condition after the fact. Under these circumstances, if the restrictive covenant is not supported by new consideration, enforceability may fail.

New Takeaway

The Delaware Supreme Court’s decision in North American Fire Ultimate Holdings LP v. Doorly reshapes how employers and investors should think about restrictive covenants tied to equity grants. By reaffirming that consideration is measured at contract formation, the court made clear that forfeited equity does not, in and of itself, render a non-compete unenforceable. This restores significant utility to equity-based incentives in structuring restrictive covenants, while underscoring the need for thoughtful drafting and comprehensive consideration planning.

For founders, investors, and deal attorneys navigating restrictive covenant design, the lesson is twofold: equity can work as consideration, and the form and documentation of that consideration matters.

This should serve as an updated strategic lens on what I previously referred to as the “forfeited equity trap.” The trap hasn’t disappeared, but the legal terrain around it has been significantly redrawn.