Verbal Equity Assurances Under Corporate Formality Standards
Statutory corporate formality standards render unwritten equity promises legally unenforceable without explicit board authorization and executed written stock agreements.
stock option authorization
Meaning
Corporate charter actions establish the pool of shares from which a company can grant options to employees or directors. Through stock option authorization, the board of directors and the shareholders formally approve the maximum number of shares allocated for the option plan. This formal approval prevents the company from granting more options than it has the legal capacity to issue.
Board Action
Formal resolutions must be passed by the directors to create the option pool. In securing stock option authorization, the board must execute a written resolution that specifies the size and terms of the pool. This step ensures that the grant program complies with state corporate laws.
Legal Protection
Properly authorized option pools protect the company and its future hires from severe tax and governance disputes. If a startup issues options before completing its stock option authorization, those grants are legally invalid and can trigger penalties under tax regulations. This compliance is verified by subsequent investors during corporate due diligence.
It prevents future disputes over share dilution and ensures that early hires hold legally enforceable grants.
Cap Table
The authorized share pool is reflected on the company’s capitalization table. When stock option authorization is finalized, the reserved shares are subtracted from the unallocated pool. This update provides clarity to investors.