Every financing and every acquisition starts with the cap table, and every cap table problem found in diligence slows the deal. Most problems are paperwork: a grant entered in the software but never approved by the board, an option priced without a current 409A, a SAFE recorded with the wrong cap. They are fixable, and far easier to fix before anyone else is looking.
The three-way tie-out
| Source | Holds |
|---|---|
| Legal documents | Certificate of incorporation, stock purchase agreements, board and stockholder consents, SAFEs, option grant agreements |
| Cap table software | Holders, share classes, grants, vesting, exercises |
| General ledger | Common stock, preferred stock and additional paid-in capital; SAFE balances; option exercise proceeds |
Each issuance should appear in all three, with matching share counts, prices and dates.
The common findings
- Grants without board approval, or approved after the grant date.
- Option exercise prices below the 409A value on the grant date, or grants made after a material event without a new valuation.
- Missing 83(b) elections for founders or early exercises.
- SAFEs entered with the wrong cap, discount or post-money versus pre-money terms.
- Share counts that exceed the authorized shares in the charter.
- Option pool usage that exceeds the plan reserve.
- Departed employees whose unvested options were not cancelled, or whose exercise window was not tracked.
- Consultant grants documented as employee grants.
Rule 701 limits
Private companies typically rely on Rule 701 to grant equity to employees and consultants without registering the securities. In any 12-month period, the amount sold under Rule 701 cannot exceed the greatest of $1,000,000, 15% of total assets, or 15% of the outstanding class. If more than $10,000,000 is sold in a 12-month period, the company must provide additional disclosure, including financial statements, to recipients. Fast-growing companies granting at rising valuations can approach these lines without noticing.
Fixing defects: Section 204
Delaware General Corporation Law Section 204 provides a process for ratifying defective corporate acts, including stock issued without proper authorization. The board adopts resolutions describing each defect; stockholder approval is needed in some cases; a certificate of validation may be filed. Counsel runs the process; finance prepares the list of affected issuances and their correct terms.
A worked reconciliation
| Item | Software | Legal | Ledger | Action |
|---|---|---|---|---|
| Founder common | 8,000,000 | 8,000,000 | $800 | None |
| Option grant, engineer | 40,000 at $0.30 | No board consent found | n/a | Ratify; check 409A date |
| SAFE, angel | $250,000, $8M cap | $250,000, $10M cap | $250,000 | Correct the software |
| Option exercise | 10,000 shares | Notice and payment on file | $3,000 missing | Book the proceeds |
Keep it clean
- Board approves grants in batches, with the 409A value stated in the consent
- New 409A valuation at least every 12 months and after any material event
- Monthly tie-out of equity accounts at close
- Termination checklist that updates the cap table the same week
We reconcile the cap table to the legal record and the ledger, prepare the schedules counsel needs for any ratification, and keep equity entries current every month.
Sources
- Delaware Code, Title 8, Chapter 1, Subchapter VI (including §204, ratification of defective corporate acts)
- 17 CFR §230.701, Rule 701 (eCFR)
- 26 CFR §1.409A-1 (eCFR)
- 26 U.S.C. §83 (Cornell LII)
Questions founders ask
Is the cap table software the source of truth?
No. The legal documents and board approvals are. The software is a record of them, and it is only as accurate as what was entered. Reconcile it to the signed documents.
What if a grant was never approved by the board?
Delaware's Section 204 lets a corporation ratify defective corporate acts, including stock issued without proper approval, through a defined board and sometimes stockholder process. Counsel runs it; finance supplies the schedules.
