2 minute watch | April.06.2026
Nick Feldman and Cody Peterson, partners in Orrick's Technology Companies Group, walk through the essential steps for granting equity to new team members – and the costly mistakes that happen when those steps get skipped.
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Nick: So, Cody, I'm a startup founder. I want to bring on a new team member and part of their comp package is equity. What do I do?
Cody: Let's talk about it. This is an important one. I usually think of it as a two-step process: if you're bringing out an employee, you usually have an offer letter or some kind of formal proposal to bring them on. Often that will reference the equity they're getting -- small point here. Please make that a number of shares and not as a percentage of equity. That is very confusing.
It's really, really important to note that that is not the grant itself -- that’s effectively a promise. Oftentimes there will be language in that offer letter that says: “Subject to approval by the board, you will be issued X number of shares.” The board approval is a really important point.
That grant is not official. It has not officially been granted until the board formally approves. That can be done in a written consent or at a formal board meeting. Depending on the stage of the company, sometimes you might get in the habit of doing quarterly board meetings and approving a batch of option grants all at the same time. But it's really, really important to formally document that process.
What happens if you don't? Have you seen a play out where the board hasn't formally approved an equity grant?
Nick: Yes, and it can create a big headache, especially from a tax perspective for the company, but especially for the team member. Because what can happen is the fair market value of the common stock of the company that this equity is being granted in can increase. So that means that either the strike price of the option or the tax event, if it's a restricted stock grant, for that recipient increases. Not only does their upside decrease, but the potential tax hit upfront when the grant is made can be more significant or, frankly, not feasible. There are ways that we can solve for that, but they're never perfect solves. And they always involve a little bit of pain and, unfortunately, legal cost.
Cody: In short, it's just really important to have the board approve an equity grant as soon as possible after that service provider has started working for the company.
Nick: That's right. These approvals, if you're hiring multiple people, they can be batched. As you mentioned, there's the promise in the offer letter, the consulting agreement, or advisor agreement. There's the board approval, and then there's actual documentation of the grant -- whether it's a stock grant agreement or a stock option agreement, you need to check those boxes. Just telling someone that they're going to get shares doesn't give them shares?