Meaning
Equity promises made to consultants or mentors that have not been formally authorized by a board of directors exist as undocumented liabilities. These unapproved advisor shares often originate from informal emails or verbal agreements made during the early days of a startup. They represent a potential claim on the company that is not reflected in the official stock book.
Documentation Gap
Legal ownership of stock requires a formal board resolution and a signed grant agreement. When unapproved advisor shares are discovered during a sale, they create a conflict between a founder’s memory and the official record. The lack of a dated signature makes it difficult to determine the exact price or the vesting schedule that was intended.
Dilution Impact
Every share promised to an advisor reduces the amount of money available to the founders and the investors. If unapproved advisor shares are validated late in the life of a company, the sudden increase in the share count can lower the payout for everyone else. This surprise can lead to tensions and a loss of trust during the sensitive final stages of a transaction.
A buyer might even demand that the founders pay for these shares out of their own proceeds to maintain the agreed valuation.
Resolution Process
Companies must often negotiate a payment or issue a formal grant after the fact to clear the title. Fixing unapproved advisor shares requires the board to retroactively approve the issuance or the advisor to waive their claim in exchange for cash. The cost of this cleanup includes legal hours and the potential for a higher price to be paid if the company’s value has increased.
