Equity (ESOP) Compliance Checklist

 

Are You About to Trigger a 20% IRS Penalty on Your Employees?

Download the 2026-2027 Equity (ESOP) Compliance Checklist.

Master 409A. Navigate Rule 701. Grant Globally Without Risk.

The "Cheap Stock" Nightmare.

Founders love giving equity. It’s the currency of startups. But if you handle it incorrectly, you turn a reward into a punishment.

I. The 409A Trap: If you grant options at a price lower than Fair Market Value, the IRS penalizes your employee with an immediate 20% excise tax.

II. The Contractor Error: Granting ISOs (Incentive Stock Options) to non-employees invalidates the tax benefits and creates an accounting mess.

III. The International Void: Giving US options to international staff can trigger immediate tax liabilities in their home country, forcing them to pay cash taxes on "paper money" they can't sell.

The Legal Attorney Equity Compliance Checklist is the CFO-grade governance framework you need to manage your Cap Table. It filters every grant through US Securities Laws, IRS Tax Codes, and International Labor Standards.

What You Get Inside the Master File:

The Global Granting Decision Matrix (Exhibit A)
A step-by-step logic flow to determine exactly which vehicle to use:
I. US W-2 Employees: ISO (Incentive Stock Options) with $100k vesting limit checks.
II. US 1099 Contractors: NSO (Non-Qualified Stock Options).
III. UK Employees: EMI Scheme.
IV. Remote/EOR Workers: VSOP (Virtual/Phantom Stock).

The Securities Law Monitor (Article III)
Specific compliance trackers for SEC Rule 701 (the $10M disclosure threshold) and California 25102(o) Blue Sky filings. Missing these deadlines allows investors and employees to sue for rescission.

The 409A Safe Harbor Protocol (Article I)
Operational rules for maintaining valid valuation reports and ensuring Board Consents explicitly tie the Strike Price to the current FMV, protecting you from IRS "Cheap Stock" audits.

International Sub-Plan Guidance (Article II)
Strategic definitions for handling non-US equity, including the use of Phantom Stock to avoid triggering foreign securities laws or creating "Accidental Permanent Establishment" tax risks.

Why Founders Need This Specific Checklist:

It Fixes "Cap Table Rot"
A messy cap table kills acquisitions. If a buyer sees undefined option grants or missed Blue Sky filings, they will hold back 10-20% of the deal price in escrow. This checklist ensures your diligence is clean.

It Protects Your Team from Taxes
Your employees trust you to handle their equity correctly. Using this checklist prevents you from accidentally triggering massive tax bills for the people you are trying to reward.

It Standardizes Board Consents
Stop guessing what to put in your Board Minutes. This framework tells you exactly what data points (FMV, Share Count, Vesting Schedule) must be ratified to make the grant legal.

Grant with Confidence. Exit with Clean Hands.

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Frequently Asked Questions

Does this replace a 409A Valuation?

No. You still need to pay a provider (like Carta or Pulley) to do the math. This checklist governs the process of using that valuation to issue the grants legally.

What is VSOP/Phantom Stock?

Virtual Stock Option Plans (VSOP) are contracts that pay a cash bonus equal to the value of shares upon an exit. They are critical for international employees because they avoid the complexities of issuing actual US securities across borders.

Do I need this if I use Carta?

Yes. Carta is a database; it does what you tell it to do. If you tell Carta to issue an ISO to a contractor, it will do it, and you will be non-compliant. This checklist ensures the inputs into Carta are legally sound.