1. Set Equity Plan Authority before Issuing Grants
Equity problems often start with a mismatch: the cap table shows a grant, but the corporate file does not support it. Review the plan, share reserve, approvals, and authority behind each award.
Confirm Who May Approve Awards
Corporate law and governing documents determine approval authority. For a Delaware corporation, DGCL §§ 152 and 157 address stock and option issuance and specified delegation. A corporate governance review can connect those rules to the plan and board record.
- Plan: Confirm adoption and current terms.
- Reserve: Reconcile available shares with outstanding awards.
- Approval: Match each grant to valid corporate action.
Check the Securities Exemption
Private-company awards can raise federal securities issues even when issued as compensation. Rule 701 may exempt qualifying compensatory offers and sales by eligible non-reporting companies.
- Recipients: Confirm that grants fit the available exemption.
- Volume: Track Rule 701 sales over each 12-month period.
- Disclosure: Check added requirements before crossing the $10 million threshold.
2. Make Award Documents Match the Plan
The plan sets the framework, but employees usually look first to their grant documents. A grant notice or award agreement should not conflict with the plan or the corporate action approving it.
Document Each Award Clearly
Options, restricted stock, and RSUs work differently. An executive compensation review can align each award with its vesting, exercise, payment, and termination terms.
- Grant: State the type, amount, date, and applicable price.
- Vesting: Define time, performance, or other conditions.
- Exit: State what happens when employment ends.
Review Forfeiture before Employment Ends
Equity-based compensation does not always qualify as wages under state labor law. Courts have distinguished awards tied to future company value from compensation directly tied to individual performance. The plan, award, vesting status, and employment terms still matter.
- Status: Identify vested and unvested rights.
- Terms: Compare forfeiture language across documents.
- Repurchase: Check any company purchase or transfer right.
3. Coordinate Tax Elections and Equity Records
Tax steps and corporate approvals serve different purposes. Keep a clear record of what the company issued and flag tax actions that may fall to the recipient.
Flag Section 83(B) Issues Early
Section 83(b) is a federal tax election, not a state-law election. For eligible property transferred in connection with services, the election generally must be filed no later than 30 days after transfer.
- Award: Determine whether a property transfer supports an election.
- Deadline: Flag the 30-day period when applicable.
- Record: Keep grant and related tax records organized.
Match the Cap Table to the Legal File
The cap table should tell the same story as signed awards and approvals. A small discrepancy is easier to address before formal investor diligence review begins.
- Issued: Match outstanding awards to approved grants.
- Changes: Record exercises, cancellations, forfeitures, and amendments.
- Pool: Recalculate available shares after material changes.
4. Prepare Equity Records for Financing
A financing can put the option pool under close review. Investors may ask what remains available, which awards are outstanding, and whether the company can support its capitalization numbers.
Review the Pool before Negotiating Dilution
An option-pool increase can change founder and employee ownership. A venture capital financing review can compare the proposed pool with the capitalization assumptions used in the transaction.
- Fully Diluted: Confirm which securities enter the calculation.
- Reserve: Identify the pool increase requested for the round.
- Impact: Model effects on existing holders and new investors.
Clean Up the File before Diligence
A missing signature or inconsistent grant date is easier to investigate before the closing calendar tightens. The cap table alone does not prove that every award was properly authorized.
- Approvals: Locate actions supporting outstanding grants.
- Agreements: Confirm signed award documents are available.
- Exceptions: Identify side promises outside standard forms.
5. Check Transfer Rights before a Secondary Sale
Secondary liquidity brings another set of documents into play. Company and investor agreements may restrict transfers or provide rights of first refusal and co-sale rights.
Map the Documents That Control the Sale
Do not review a secondary sale from the cap table alone. Rights may appear in several agreements, and their interaction can determine which notices, consents, or transfer steps apply.
- Holder: Confirm the security the seller owns.
- Rights: Review transfer, ROFR, and co-sale provisions.
- Consent: Identify required approvals or notices.
Update the Record after Closing
The closing file should show current ownership and continuing rights. A capital markets and securities review can also address the securities record as the company approaches a public-market transaction.
| Record | Before Sale | After Sale |
|---|---|---|
| Cap table | Seller and security | Current ownership |
| Award file | Vesting and transfer terms | Remaining award status |
| Investor rights | ROFR and co-sale terms | Continuing rights |
6. Frequently Asked Questions
Does every employee equity grant require SEC registration?
No. Rule 701 may exempt qualifying compensatory offers and sales by eligible non-reporting companies, but its recipient, amount, and disclosure conditions must be checked.
Can an employee make an 83(b) election for an RSU?
An unfunded RSU generally does not transfer property at grant, so an 83(b) election generally is not available then. Review the actual award before reaching a tax conclusion.
Can a company cancel unvested equity after termination?
The answer depends on the plan, award, vesting status, employment terms, and applicable law. Review those documents before treating an award as forfeited.
Should equity grants be reviewed before pre-IPO financing?
Yes. Investors may examine the option pool, awards, approvals, exercises, vesting terms, and cap table. Resolving discrepancies early can make diligence cleaner.
7. Prepare Pre-Ipo Equity Documentation with Sjkp
Pre-IPO equity investment counsel in Manhattan can help align plan authority, award documents, tax issues, capitalization records, financing diligence, and secondary transfers. SJKP's attorneys can review the equity file and coordinate corrections before documentation gaps complicate the next transaction.
24 Aug, 2026
