Verifying Incorporation Status and Board Equity Consents
Equity validity depends on active state corporate standing, strict board consent compliance, and share counts remaining inside charter limit caps.
ungrounded equity
Meaning
Unrecorded or unauthorized share promises represent potential equity claims that lack formal board approval or legal documentation. Startups that issue ungrounded equity expose themselves to disputes when those promises are not honored. Legal boundaries must be maintained to prevent informal pledges from diluting documented share holdings.
Allocation Deficit
Discrepancies between promised and authorized stock occur when founders make casual commitments during early-stage recruitment. These promises are often undocumented and absent from the official stock ledger. When the recruit attempts to claim the shares, the company must resolve the deficit through retroactive board authorizations.
Option Dilution
Granting options without a registered pool of shares results in invalid incentive agreements. Boards must establish and approve an option plan before issuing stock options to employees. Issuing options beyond the approved pool creates unauthorized obligations that complicate audit processes and damage employee relations.
This issue arises because employees expect their options to be backed by actual authorized shares, meaning any shortfall requires the board to amend the corporate charter to increase the total share count.
Record Discrepancy
Disorganized records leave the firm vulnerable to legal challenges from employees and early backers. Corporate lawyers must reconcile the cap table to ensure every outstanding share is accounted for. This exercise is necessary for securing institutional funding.