1. Founder Agreements Should Come before the Cap Table Expands
Before issuing founder stock, the team should settle ownership, vesting, departure rights, and IP ownership. Founders should settle these terms before a new investor, hire, or exit raises the cost of fixing them. A written record also reduces later disputes about what founders thought they had agreed.
Document Founder Stock and Vesting Terms
- Record share numbers, purchase price, vesting, repurchase rights, and transfer limits.
- Match board approvals, stock purchase documents, and the cap table to the same transaction.
- Consider a federal Section 83(b) election when restricted property is transferred; the filing deadline is generally 30 days after transfer.
Review Prior Employment and IP Duties
- Check prior agreements before using code, designs, inventions, or confidential material from earlier work.
- Business and Professions Code § 16600.5 bars employers from entering into or attempting to enforce contracts that are void under that restraint-of-trade chapter.
- Labor Code § 2870 limits assignment clauses for some inventions made on an employee’s own time without employer resources or trade secrets, subject to exceptions.
2. Equity Approvals Should Match the Cap Table
Equity records should show what the company authorized, what each founder bought or received, and what remains available for future grants. A cap table is useful only when the underlying approvals and agreements support it.
Tie Each Issuance to Corporate Authority
| Record | What to Verify |
|---|---|
| Board, manager, or member approval | The issuance or grant was authorized on the stated date. |
| Purchase or grant agreement | Price, vesting, transfer limits, and other terms match the approval. |
| Cap table and stock ledger | Share or unit counts reconcile with signed records. |
If formation papers or approval authority are unclear, a focused business formation review can address the underlying entity and governance record.
Fix Record Gaps before the Next Grant
- Compare the charter or articles, bylaws or operating agreement, approvals, equity records, and cap table.
- Confirm the entity has authority for the planned issuance before shares, units, or options are granted.
- Correct inconsistent names, dates, counts, or signatures before a financing or new equity grant.
3. Founder Stock and Equity Compensation Need Separate Analysis
A cap table alone does not prove each grant was approved or exempt. Each grant should tie back to a dated approval and the share count shown in company records.
Separate Founder Stock from Option Grants
- Restricted founder stock may carry vesting and company repurchase rights from the purchase date.
- A standard unexercised option generally does not involve the property transfer that triggers a Section 83(b) election.
- Option documents should state eligibility, exercise price, vesting, expiration, and grant approval.
Match Grants to the Correct Securities Path
- Federal Rule 701 can cover qualifying pay-related securities transactions, not fundraising.
- Corporations Code § 25102(o) can exempt qualifying Rule 701 transactions if its conditions are met.
- The required state notice is due no later than 30 days after the initial issuance under the plan or agreement.
An employment and compensation review can address equity grants within a broader pay plan.
4. Hiring Documents Should Track Worker Status and IP Ownership
Worker status and IP ownership require separate review. Written terms also help show which party owns code, data, design, and other work.
Use Agreements That Match the Relationship
- Offer letters and employment documents should address pay, confidentiality, and relevant invention-assignment terms.
- Contractor agreements should define services, fees, deliverables, confidentiality, and ownership or assignment of work product.
- For core technology, review the intellectual property chain before fundraising, licensing, or a key transaction.
Do Not Treat Contractor Status As a Contract Label
- Labor Code § 2775 generally applies the ABC test for purposes covered by that statute.
- Exceptions and other contexts can require a different test.
- Recheck status when a contractor’s role changes, especially if the person moves into operations or management.
5. Fundraising Should Use a Separate Securities Analysis
A SAFE, note, or preferred-stock round should align approvals, investor communications, and the chosen exemption. Compensatory equity rules do not replace the securities analysis for a capital raise.
Confirm the Exemption before Soliciting Investors
- Rule 506(b) generally does not permit general solicitation or advertising.
- Rule 506(c) permits general solicitation if all purchasers are accredited investors and the issuer reasonably verifies that status.
- Regulation D issuers generally file Form D within 15 days after the first sale; state notice filings or fees may still apply.
Prepare the Record before the Next Financing
- Reconcile the cap table against stock, option, SAFE, note, and conversion documents.
- Collect board and stockholder approvals, IP assignments, employment records, and material contracts.
- A venture capital and growth equity review can address deal terms and investor rights in depth.
6. Frequently Asked Questions
Can two founders simply split the company 50/50?
Yes, but equal ownership should not leave voting, vesting, departure rights, or deadlock unresolved. The documents should state how decisions are made and what happens if one founder stops working for the company.
Does every stock option require a Section 83(b) election?
No. A standard unexercised option generally is not the restricted property transfer addressed by Section 83(b). Early exercise or another restricted-stock arrangement can require a different tax analysis.
Can contractors build the startup’s core product?
They can, but classification and IP ownership must be analyzed separately. The working relationship may affect employment status, while a written assignment may be needed to establish ownership of the work product.
Can a private startup advertise a Rule 506(b) fundraising round online?
Rule 506(b) generally prohibits general solicitation. A company planning public marketing should evaluate another available exemption, such as Rule 506(c), before solicitation begins.
7. Review the Legal Record before the Next Growth Event
SJKP’s attorneys can review founder equity, governance records, IP assignments, compensation documents, and financing materials together. Before a first hire, equity grant, or financing, that review can identify missing approvals, cap-table gaps, and contract terms needing attention.
22 Sep, 2026
