Meaning
Equity allocations that have not received the required approval from a board of directors are legally precarious. These unratified stock grants often occur in the early days of a company when founders promise shares to employees in a casual setting. They lack the necessary resolutions and signatures to be recognized as valid by a transfer agent.
This creates a significant problem during a tax audit or an acquisition.
Remediation Process
Fixing these errors usually involves a retroactive board consent or a formal ratification by the shareholders. If unratified stock grants are discovered late, the cost of the shares may have changed, leading to tax liabilities for the recipient. Legal counsel must review every email and offer letter to determine the original intent of the parties.
This cleanup process is time consuming and expensive.
Investor Concern
Diligence teams look for these missing approvals as a sign of poor corporate hygiene. An abundance of unratified stock grants suggests that the company’s records are unreliable. This can lead to a lower valuation or a requirement for a larger indemnity from the founders.
Ownership Proof
Valid shares require a complete paper trail. The unratified stock grants represent a gap in the foundation of the company.
