Verifying Charter Share Capacity Before Signing Service Compensation Contracts
Verifying charter share capacity confirms authorized unissued shares before executing service agreements, preventing unenforceable stock compensation claims.
share authorization floor
Meaning
Minimum requirements for unissued stock ensure that a corporation can fulfill its future promises to convert debt or exercise options. The share authorization floor is the sum of all shares currently issued plus those promised under outstanding warrants, notes, options and equity incentive plans. Maintaining this level prevents the company from being in a position where it owes shares it does not have the right to issue.
Reserve Management
Calculating the necessary buffer involves an audit of every contract that mentions equity. A share authorization floor must be high enough to cover the maximum possible conversion scenario for all instruments, including those that only convert under specific performance hurdles. If the floor is reached, the company must stop granting new options until the charter is amended, a process that can take weeks of legal coordination.
Legal Compliance
Issuing shares that do not exist under the charter is a violation of corporate law. The share authorization floor acts as a warning system for the board of directors. It is a documented limit that triggers a shareholder vote to increase the authorized count.
Inventory Control
Founders track their available equity like any other resource. Monitoring the share authorization floor allows management to plan for the next financing round or a major hiring push. A lack of authorized shares can stall a deal at the final hour.