The final fiscal quarter can be a stressful time for any company. As you finalize your numbers for the year, you’ll want to make sure that your capitalization tables are accurate and consistent with your ownership records and legal documents. If there are discrepancies, you want to find them before your numbers are incorporated in your draft financial statements. You don’t want to find any errors at the last minute that could delay your year-end reporting.
Here are the five types of documents you need to review to confirm that your ownership data and related capitalization tables are 100% accurate:
1. Charter Documents
Your articles or certificate of incorporation describe the number of shares authorized for each class of stock. You should confirm how the number authorized has changed over time for original classes and new classes. You should confirm that, at any point in time, you have sufficient shares authorized to cover the issued and reserved shares. To confirm this information, make sure that you have a complete set of the charter or incorporation documents for your company that have been filed with the Secretary of State, from inception to the current date. Begin with the original charter and track forward in time through all the amendments that have been filed. You should list the authorized shares for each class and the effective date of each change. Check that at the end of each reporting period, there were sufficient shares authorized to account for the number issued and reserved. Finally, confirm that the number reserved for each class is correct at each reporting period.
2. Stock Option Plans
The number of shares reserved for stock options and other convertible securities should be correctly reflected for the each class (typically common stock) into which the grants are exercisable or convertible. Since the option pool can be counted in certain reports as part of the number deemed to be outstanding (even if not yet granted), the size of the option pool can have a major impact on the fully-diluted cap table numbers. It also changes over time based on Plan documents and board actions. To verify the number of shares that should be reserved for shares that could be issued under the plan, look first at the original Plan document and then look at any Board resolutions that may have changed the Plan over time.
3. Board Minutes and Consents
Every stock, option or warrant issued or granted must be authorized by appropriate Board actions. From the initial founders’ stock to the most recent stock issuance, you should have written and signed resolutions authorizing the shares. For financing rounds, this may be in the form of Board resolutions authorizing a financing with the details further described in a stock purchase agreement. For options, there should be Board resolutions authorizing every grant with a list of who got the grant, how much, when, what has to be paid, and how will it vest. To confirm your records, you will need to compare each record to the related Board actions. For example, with respect to stock option grants, confirm the date of grant (the board date), the exercise price, the vesting schedule, and the vesting start date. To confirm qualified options, check the exercise price against the current fair market value.
4. Stock Option Awards
After having confirmed that the Board resolutions correctly reflect the intent of the Board actions, the next step is to review the signed option grant documents and compare these documents to the Board resolutions and your options records. You’ll want to confirm that the grant document conforms to the Board resolutions and that your records correctly reflect the signed grant. Any discrepancies should be cleared up immediately. One common problem is when the vesting schedule as written in the option agreement is not consistent with the Board intent. Mistakes in or misinterpretation of the wording of the written vesting description can result in problems down the road, particularly when an employee is terminated and there is a disagreement about the number of shares vested. If you find these kinds of errors in advance, it is much easier to resolve the discrepancy.
5. Stock Purchase Agreements
Your ownership records should accurately reflect the intent of each stock purchase agreement. For each agreement, compare the terms with your records. As an example, compare the Schedule of Investors in a Preferred Stock purchase agreement to your stock records. Confirm that the number of shares issued and price paid as reflected in your records are consistent with what is stated in the purchase agreement. Then, review the conversion ratios or each preferred or convertible class to make sure it converts into the right number of common stock when it was first issued and as dilutive issuances may have changed that number over time. Finally, look at the fully-diluted capitalization table reports to confirm that the fully-diluted numbers for all classes accurately reflect the as-converted numbers for each class of convertible stock at each reporting period.
If you examine these types of documents and validate the information against your ownership records, you will help to ensure the accuracy of your equity reports and the information provided in your financial statements. You’ll have confidence that your auditors can review your data and find the legal document back-up. By doing so, you will avoid last-minute errors and additional calculations and be able to devote your time to more important reporting matters.
If you want to have 100% accurate capitalization tables that are supported by a complete set of legal documents, let us know. Whether you want us to clean-up your existing ownership records or convert them to our system Corporate Focus, we can help you get organized so you can report your capitalization numbers with complete confidence.