Issuing stock feels simple — decide who gets what, update the spreadsheet, move on. But every issuance is a legal event with three moving parts: corporate authorization, securities-law compliance, and documentation. Private California companies get at least one of the three wrong constantly, and the errors surface at the worst times: a financing, an acquisition, or a fight with a former founder or employee. Here are the mistakes that appear over and over, and what fixing them involves.
Mistake 1: issuing shares without board approval
Shares are issued by the corporation, and the corporation acts through its board. An issuance with no board resolution or written consent behind it has an authorization defect — and a stack of stock certificates signed by an officer does not cure it. Related traps: issuing more shares than the articles authorize (an over-issuance is void, not merely voidable), and issuing for the wrong consideration. Corporations Code § 409 governs what shares may be issued for — money paid, labor done, services actually rendered, and certain other consideration — and notably, a promise of future services is not valid consideration for California shares. The board should approve every issuance, state the consideration, and confirm the math against authorized shares, every time.
Mistake 2: skipping securities compliance
Founders routinely absorb that selling stock to the public is regulated, then assume issuances to themselves, friends, and employees are exempt from everything. Exempt from registration, usually — exempt from process, no. Most early issuances by California companies rely on the limited-offering exemption in Corporations Code § 25102(f), which has substantive conditions (a cap of 35 non-accredited purchasers with pre-existing relationships or sophistication, purchase for the buyer's own account, no general advertising) and a notice filing with the Department of Financial Protection and Innovation. Federal law applies in parallel — Rule 506 of Regulation D, or Rule 701 for equity compensation, each with its own conditions and, in some cases, its own filings. Skipped or blown exemptions create rescission exposure — investors may have the right to demand their money back — and they are a standard diligence question with no good answer except a clean file or a cleanup plan.
Mistake 3: promising equity instead of issuing it
"You will get five percent" — said to an early employee, a contractor, or an advisor, and never papered — is the most litigated phrase in startup law. Years later the company has value, memories diverge, and the recipient claims a percentage of today's company while the founders remember a smaller, earlier promise. Options purportedly granted without board approval or a written plan or agreement, "equity in lieu of pay" arrangements memorialized only in text messages, and handshake advisor deals all belong in this category. The practical rule is simple: every equity arrangement should be board-approved and signed. Anything less creates avoidable litigation risk, and those disputes are a staple of business litigation.
Mistake 4: paperwork that does not match reality
Even where approvals and exemptions exist, the record set is often incomplete: no stock ledger, certificates never issued or lost, vesting terms that differ between the board consent and the signed agreement, missing 83(b) elections for restricted stock (a 30-day, no-extension IRS deadline), transfers between shareholders that nobody documented, and a cap table spreadsheet that reconciles to nothing. The stock ledger is the corporation's ownership record, and the minute book records its corporate actions — California law requires those records to be kept (Corporations Code § 1500) — and when the spreadsheet, the ledger, and the signed documents disagree, every discrepancy becomes a negotiation. Treat the cap table like a bank statement: every line traceable to a board action and a signed instrument, reconciled at least annually as part of your corporate governance routine.
How cleanup actually works
Discovering these problems is not fatal; most are repairable with diligence and candor. A typical cleanup:
- Audit. Reconstruct the issuance history from every source — consents, agreements, certificates, tax filings, emails — and build a defect list.
- Ratify. Authorization defects are commonly addressed with board (and where needed shareholder) ratification of past issuances, done carefully so the ratification itself is valid.
- Re-paper. Missing agreements get signed, the ledger gets rebuilt, certificates or book-entry records get regularized.
- Address securities gaps. Options range from late notice filings to, in some situations, structured rescission offers — a judgment call requiring counsel, made before an investor's lawyers make it for you.
The pattern to notice: cleanup done on your own schedule costs a fraction of cleanup done inside a deal timeline, where every defect has a price tag attached by the other side.
Talk to a California business attorney
If your cap table has history that was never properly papered — or you want the next issuance done right the first time — we can audit, repair, and set up a clean process going forward. Schedule a free consultation or call (949) 418-2113.
This article is attorney advertising and provides general information only. It is not legal advice and does not create an attorney–client relationship. Facts matter; consult a lawyer about your specific situation.
