Admin Super Powers-Part 10: Getting Ready for Big Things

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So your company has been growing, like a weed, and the executives are looking to grow more. Maybe they’re looking to acquire another company or be acquired. Maybe they’re prepping for a venture capital investment. Or maybe you’ve even heard rumors of an IPO. Eek! How exciting, right? The first question you’ll want to ask is (drum roll) “Are all of our securities issuances properly issued and fully documented?”

That’s not what you were thinking, was it?

Really, though, if your company issues stock or options, that will be one of the most important questions you can ask and the answer can make your execs comfortable and confident in their negotiations—or very anxious.

Any corporate transaction—that’s what those kinds of activities are called—is a big deal. The value of the company will be based, in part, on how much stock and securities the company has outstanding. Part of the transaction documentation is a legal opinion by the company’s attorney that says all stock and any security convertible into stock has been properly authorized by the board and issued in compliance with securities laws.

Where to start?

You will want to recommend that whoever is handling your company’s capitalization table, stock ledger, and equity award ledger do a cap table audit. Let’s start with some terminology:

  • Corporate transaction – mergers & acquisitions, venture capital investment, friends & family financing round, IPO, any activity involved with investing in the company
  • Capitalization table – report that shows how many shares of stock or securities are issued and who owns what percentage of the company
  • Securities – stock or any instrument which can be converted into stock (e.g., warrants, options, other equity compensation awards)
  • Stock ledger – report of all stock issuances and related historic activity (e.g., splits, transfers, repurchases, cancellations)
  • Option / equity compensation ledger – report of all award issuances and related historic activity (e.g., repricings, exercises, cancellations)
  • Charters – legal documents filed with the state of incorporation that detail the company’s authorized capital and amendments to capital (e.g., how many of each type of stock are authorized for issuance, stock splits, conversions)
  • Board authorizations – minutes or unanimous written consents by the board of directors which authorize corporate activities (e.g., charter filings, sale of stock, issuance of securities, option plans and share reserves, and award grants)
  • Shareholder authorizations – minutes or consents by shareholders which approve any stock-related event that would result in dilution to their holdings (e.g. option plan and share reserves, stock sales, investment rounds, etc.)

How deep to dig?

Sometimes a corporate transaction will be small and fast. Like a Friends and Family round of investment. Basically the founders go out and ask the people they know personally to make an investment in the company, they’ll get the money, and then someone will say, “Hey, we need to document this investment!” In that situation, the number of previous stock and securities issuances may be so small that the legal opinion is made based on the company’s current cap table without actually verifying that the numbers are correct, the issuances are backed up by board authorizations, and transaction documents are all signed and on file. Not a good way to start, but definitely a common event.

When the company gets bigger, though, the corporate transactions involve more money and the investors want assurances that the company has been doing things the right way. In this circumstance, the legal opinion carries much more weight and the lawyers want to be sure that what they say is accurate and true. That’s where the cap table audit comes in.

Step by step

A cap table audit should be done by someone who understands how to review legal documents (charters, minutes, consents, securities filings), transaction documents (stock purchase agreements, transfer agreements, etc.), and equity compensation documents (plans, awards, exercise notices, etc.)

When I do a cap table audit, it’s six steps:

First: Prepare a chronological listing of charters with authorized capitalization, securities filings, and 409A valuation reports.

Second: Add the board and shareholder consents in date order, highlighting those approving stock sales and equity award issuances.

Third: Review the option/award ledger, comparing all dates and details of awards against the original board authorizations.

Fourth: Review the transaction documents for option awards—making sure that the award document details match the ledger and board approval terms, and cross-check exercise documents against the stock ledger for certificates issued.

Fifth: Review the stock ledger—matching all issuances against board authorizations and transaction documents.

Sixth: Prepare a report of findings, including any compliance issues, conflicts or inconsistencies.

That’s the summary explanation. There are professional consulting services like the one I work for that can support your company in preparing for a corporate transaction. If you’d like to read some scary stories of companies that would have failed the cap table audit (if they’d bothered to do one) this book, If I’d Only Known That, has several doozies!

Next month is the IAAP Summit in Florida! Yay! I’ll see you all there and then start the Admin Super Powers blog back up in August with some real life examples of what happens when stock plan administration takes a walk on the wild side!


Thanks for reading the Admin Super Powers! blog series on stock and option plan administration published by IAAP. I’m coming to IAAP Summit 2016 in Hollywood, FL in July. It would be great to meet all of you! Of course, my company would like to know the equity plan administration needs and wants of conference participants and, gratefully, IAAP is allowing me to include this 3-question survey to get a general idea. Your answers are very much appreciated. See you at the Learning Table sessions at IAAP Summit—I’ll be holding 10 minute Q&A sessions on Sunday at 10:05 a.m. and Monday at 1:35 p.m. “Inside Tips on Stock & Options at Your Company”
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