Meaning
Proposed stock option distributions that have been promised or issued to employees but lack the necessary formal approval from the board of directors remain legally incomplete. These unratified option grants do not give the recipient any actual ownership rights until the board passes a corrective resolution. This discrepancy between the employee’s expectations and the corporate records often emerges during financial audits or exit transactions.
It must be resolved through a formal board vote.
Evidentiary Deficit
Discovering promised equity that lacks board approval exposes the company to ownership disputes and legal challenges. Resolving unratified option grants requires the board to either approve the options retroactively or negotiate a settlement with the affected employee. This situation often arises when executives make informal commitments during the hiring process.
Ratification Process
Approving past grants requires a formal resolution that acknowledges the omission and establishes the current grant terms. If the board decides to resolve unratified option grants, the new valuation may be higher than the promised price, which can cause dissatisfaction. This requires a careful explanation of the tax consequences to the employee, as the exercise price must reflect the current fair market value to comply with tax laws.
The company may offer cash bonuses or additional options to offset the higher exercise price. This action protects the relationship while maintaining compliance.
Prevention Protocol
Establishing a centralized equity tracking system prevents the creation of informal or unapproved commitments. Eliminating unratified option grants ensures the capitalization table remains accurate and audit-ready.
