The paperwork that makes a grant real: board consents, 409As and Rule 701

Every number in this series assumes the grants behind it are valid. Plenty are not — not because anyone acted badly, but because the paperwork lagged and nobody noticed until diligence.

Here is the chain that makes a grant real.

The order of operations

1. Adopt an equity plan, approved by the board and the shareholders, with a share reserve.
2. Have a current 409A valuation establishing the fair market value of common stock.
3. Board approves the specific grant — recipient, number of shares, strike price, vesting, option type — by resolution or written consent.
4. Issue the grant agreement and get it signed.
5. Record it on the cap table, against the pool.

Skip step 3 and there is no grant, only a promise. An offer letter saying “you will receive 40,000 options” is a contractual commitment to grant, not equity. The grant date is the board approval date, and the strike price must be the fair market value on that date — which is why a backlog of unapproved promises is expensive when the valuation has moved up in the meantime.

The 409A cadence

A 409A valuation supports the safe harbour for twelve months, or until a material event — a priced round, a significant secondary, an acquisition approach, a dramatic change in the business.

Practical rules:

• Refresh annually, and immediately after closing a round.
• Do not grant options between a signed term sheet and the new valuation if you can wait; that gap is where under-priced strikes are created.
• Keep every historic valuation report. You will need them in diligence, and the provider that produced them may not be reachable when you need it.

ISO rules worth knowing before you grant

The $100,000 limit. The aggregate grant-date fair market value of ISOs that first become exercisable in any calendar year cannot exceed $100,000 per employee. Anything above that is automatically treated as an NSO. Large grants with standard monthly vesting routinely trip this, and the split is calculated per employee per year — the plan administrator must track it.

The holding periods. ISO tax treatment requires the shares be sold at least two years after grant and one year after exercise. Sell earlier and it is a disqualifying disposition: the spread at exercise becomes ordinary income.

Employees only. ISOs can only be granted to employees. Advisors, contractors and non-employee directors receive NSOs.

Rule 701: the exemption behind employee equity

Issuing securities normally requires registration. Rule 701 is the federal exemption that lets a private company grant compensatory equity to employees, directors and certain consultants without it.

The threshold that matters: if the aggregate amount sold in any consecutive twelve-month period exceeds $10 million, the company must deliver enhanced disclosure to every recipient in that period — the plan documents, risk factors, and financial statements no older than 180 days.

Two details founders get wrong:

• The obligation attaches to the twelve-month period in which you cross the threshold, not permanently. Quieter periods before or after do not require enhanced disclosure.
• The consequence of missing it is not a fine — it is losing the exemption for everything issued in that period, which turns a compliance slip into a rescission problem across every grant in the window.

The SEC’s Division of Corporation Finance issued new and revised Compliance and Disclosure Interpretations on Rule 701 on 6 March 2026, so if your policy was written before that, it is worth a review with counsel.

State rules apply on top of the federal exemption, and non-US jurisdictions have their own regimes entirely.

The calendar that keeps this from rotting

Cadence	Task
Each board meeting	Approve pending grants; record the consent
Monthly	Process leavers — cancel unvested, start exercise windows
Quarterly	Reconcile board approvals ↔ grant letters ↔ cap table
Quarterly	Export the full cap table to storage you control
Annually	Refresh the 409A; check the Rule 701 twelve-month total
Annually	Confirm authorised share headroom before the next round
Per grant	Check the ISO $100,000 limit for that employee and year

None of this is difficult. It fails because it is nobody’s named job. Assign it — to a person, not to a team — and it takes an hour a month.

What “clean” means in diligence

An acquirer’s counsel checks that every outstanding share and option traces to: a board approval, a signed agreement, a strike at or above the FMV on the approval date, an exemption from registration, and a matching cap table line.

Anything that fails that trace becomes a representation you cannot make, an indemnity, or an escrow. Clean records are worth real money at exactly one moment, and the work has to have been done years earlier.

Next

Part 13: secondaries and tender offers — how employees actually turn vested equity into cash before an exit, and what a company-run tender involves.