Startups often play fast and loose with equity; promising a small piece of the company to anybody who helps out, but never going through the legal process necessary to actually issue shares or the administrative exercise of maintaining proper stock ownership records. Failing to do either can lead to big problems if a dispute arises later about who really owns shares in the company.
Granting equity, including stock or options, typically requires four things: (1) the company must have enough shares authorized in its charter to actually issue the shares (see this post); (2) the company’s Board of Directors must formally approve issuing the equity to the recipient; (3) the company must receive whatever payment for the equity the company’s Board of Directors deems sufficient (this is typically cash, but can be services or even property); and (4) the company must comply with any applicable state and federal securities laws.
A startup should keep track of the following information with respect to all equity it issues:
- Name of equity holder
- Type and amount of equity (ex. “500 shares of common stock”)
- Payment received for the equity
- Date the equity was issued or transferred to the equity holder
- If applicable, date the equity is transferred by the equity holder to someone else
.