Auditing Authorized Charter Shares Before Executing Service Agreements
An audit of unreserved charter shares prevents ultra vires share promises in service agreements by establishing statutory issuing capacity before execution.
stock option allocation
Meaning
Board-approved distributions assign specific quantities of equity options to employees, advisors, or founders from the company’s designated option pool. Under stock option allocation, the recipient receives the right to purchase shares at a fixed strike price after satisfying continuous service requirements. This process establishes the individual vesting schedules and exercise terms.
Administrative Tracking
Tracking the remaining unallocated options in the pool is necessary to prevent promising more equity than the board has authorized. When stock option allocation occurs, the cap table must be updated to subtract the allocated shares from the available pool. This tracking prevents the company from making unauthorized grants that exceed the limits of the equity incentive plan.
It requires continuous coordination between human resources and the legal department.
Board Approval
Board resolutions must authorize every option grant to ensure its validity under corporate bylaws and state law. A proper stock option allocation requires a board vote that specifies the name of the recipient, the number of options, the vesting schedule, and the exercise price. Options granted without this approval are void and do not confer any legal rights to the employee.
This requirement ensures that the board retains complete control over the company’s capital structure. In addition, the resolution must specify the fair market value determined by the most recent independent appraisal to avoid tax penalties.
Strategic Reserve
Companies maintain a reserve of unallocated options to attract talent as the business expands. When stock option allocation is handled carefully, the remaining pool is kept large enough to cover expected hiring needs for the next twelve to eighteen months. This planning avoids the need for frequent shareholder meetings to vote on expanding the pool.
It provides the company with the flexibility to hire contributors without administrative delays.