What is the standard protocol for granting equity compensation?
Takeaway: Granting equity is a formal, multi-step legal process that requires board approval, a specific grant date, and formal legal agreements to be valid and to protect both the company and the employee.
In the fast-paced environment of a startup, it can be tempting to treat an equity grant as an informal promise made during a recruiting call. This is a dangerous mistake. An equity grant is the issuance of a security, and it must be handled with the same legal rigor and formal process as any other corporate action. A "handshake" grant is legally meaningless and can create immense confusion and potential liability.
To be valid and compliant, every grant of stock options or other equity awards must follow a standard, multi-step protocol. This process ensures that there is a clear, unambiguous, and legally binding record of every equity award the company makes.
The Four Steps of a Compliant Equity Grant
Board Approval and Setting the Grant Date: The process always begins with the company's Board of Directors.
The Approval & Grant Date: The board must formally approve the grant. This is typically done via a Unanimous Written Consent. The consent will specify the name of the recipient, the number of shares, the vesting schedule, and all other material terms of the grant. The board resolution will establish the official grant date. This is a critical date, as it is the date used to determine the option's exercise price based on the current 409A valuation.
The Stock Option Agreement: This is the formal legal contract between the company and the recipient that governs the terms of the option grant.
Key Terms: The agreement will detail the number of shares, the type of option (ISO or NSO), the vesting schedule, the post-termination exercise period, and other key provisions.
It Must Be Signed: The agreement must be formally signed by both an officer of the company and the recipient. This creates a legally binding contract. Most companies use cap table management platforms like Carta to handle the electronic signing of these agreements.
Communication with the Recipient: Once the grant is approved and the agreement is generated, it must be formally communicated to the employee. They should receive a copy of the signed stock option agreement and the company's stock incentive plan.
Cap Table Management: The grant must be immediately and accurately recorded on the company's capitalization table. This includes the grant date, the number of shares, the vesting start date, and all other relevant details. Maintaining a real-time, accurate cap table is an essential corporate hygiene function.
This formal, documented process is non-negotiable. It protects the company by ensuring that all grants are properly authorized and have clear, legally binding terms. It protects the employee by providing them with a formal, written contract that clearly outlines their rights. Any deviation from this protocol creates legal risk and is a sign of a poorly managed company.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.