You Promised Equity. You Did Not Grant It. Here Is Why That Matters.

A founder hires an engineer in month four. The company has no money but a real product and genuine momentum. They agree on salary and equity. The founder says one percent, vesting over four years. The engineer accepts. They both sign an offer letter that says equity to be determined pending board approval.

Two years later, the company raises a Series B. The engineer, who has been there from the beginning, asks about their options. They want to understand the strike price and when they can exercise. And that is the moment the founder discovers that the equity conversation never became an equity grant.

The offer letter mention does not count. The verbal agreement does not count. The fact that both parties understood and intended the equity does not count. What counts is a board resolution authorizing the grant, a formal option agreement signed by the employee, and a strike price set by a qualified 409A valuation. Without those three things, the equity does not legally exist.

WHAT THE PROCESS ACTUALLY REQUIRES

An equity grant under a stock option plan is not a handshake, an offer letter mention, or a line on your internal spreadsheet. It is a documented transaction that requires several things in sequence.

First, the company needs an equity incentive plan adopted by the board and approved by the shareholders. This plan sets the rules: how many shares are available, what types of options can be issued, how vesting works, and what happens on termination. If you do not have an equity plan, you cannot issue options under one.

Second, each individual grant requires board authorization. The board, or a committee with delegated authority, must pass a written resolution approving the specific grant: who receives it, how many shares, the vesting schedule, and the strike price. A conversation in a board meeting that was never memorialized in a signed resolution does not satisfy this requirement.

Third, the strike price must equal the fair market value of the common stock on the date of the grant, as determined by a 409A independent appraisal. If the strike price is set below fair market value, the option holder faces ordinary income tax on the spread plus a twenty percent penalty under Section 409A of the Internal Revenue Code. For any company that has raised venture funding, issuing grants without a current 409A creates a tax problem for every recipient.

Fourth, the employee signs a grant notice and an option agreement. The company maintains these documents and produces them in diligence.

WHY THIS GAP EXISTS

The gap between equity promises and equity grants is one of the most common legal problems I see in early-stage companies, and it is almost never the result of bad intentions.

Early hiring conversations move fast. A founder is trying to bring in someone they need, equity is part of the offer, and the formal grant process feels like something to handle once things settle down. The offer letter says equity grant subject to board approval because someone told the founder to include that language. The board approval and the documentation never happen. Then the company raises another round, the cap table gets complicated, and the founder is managing a dozen other things. The equity conversation from eighteen months ago is no longer on anyone's calendar.

The problem compounds quietly. Every month that passes without a formal grant is another month the employee's vesting clock is not running on a documented instrument. When a liquidity event, a new financing, or a departure finally forces the question, the company is explaining an undocumented equity claim to an investor, an acquirer, or an employment attorney.

Every month without a formal grant is another month the vesting clock is not running on anything legally documented.

WHAT THIS ACTUALLY COSTS YOU

The most immediate cost is a legal dispute with someone who built your company.

If an employee believes they were promised equity and the company cannot produce a grant, the employee's options are limited to negotiating for retroactive documentation or filing a claim. Retroactive grants are complicated — the strike price should have been set at the time of the original grant, and a backdated grant at the current price may not reflect the terms the parties actually agreed to. A claim puts the company in the position of litigating whether a contract was formed, what the terms were, and what the employee is owed. Neither outcome is clean.

The second cost is investor diligence. Investors and acquirers ask for every outstanding option grant, the board resolution authorizing each one, and evidence of a 409A valuation supporting the strike price. An equity claim without documentation is a disclosed liability. A disclosed liability affects price, terms, and deal confidence. An undisclosed equity claim discovered during diligence is worse.

The third cost is tax exposure for the option holder. If a grant is documented retroactively with a strike price below the fair market value at the time of the original promise, the recipient may owe taxes and penalties under Section 409A. That obligation does not belong to the company, but it belongs to someone who trusted you.

HOW TO FIX THIS

If you have made equity promises that have not been formally granted, the time to address them is now, before a financing, an acquisition, or a departure makes the conversation adversarial.

Start by auditing your equity promises. Talk to everyone who has been told they have or will have equity. Confirm what was said, when it was said, and what vesting terms were discussed. Do this in writing.

Get a current 409A valuation if you do not have one, or if your existing one is outdated. For any company that has raised institutional capital, a 409A is a prerequisite to issuing grants at a defensible strike price.

Bring the grants to the board for approval. Get written resolutions. Understand who has the authority to approve grants and how that approval must be documented under your equity plan.

Get signed grant notices and option agreements to every grantee. Keep copies in your corporate records and in your data room. The data room article in this series covered why that matters.

A fractional general counsel can run this process with you, whether it is a one-time cleanup or an ongoing practice for every new hire. The companies that do this well are not the ones with the most complicated equity structures. They are the ones who document every grant the week it is approved, so there is never a gap between the promise and the paper.

The gap between an equity promise and an equity grant is one of the most fixable problems in startup law, but only when you address it before it becomes a dispute.

If you have questions about equity grant documentation, 409A valuations, or how a fractional general counsel can help your company build a clean equity record before you need it, reach out at laurafleetconsulting.com.