The 5-Step Checklist Before Your First Stock Option Grant

Five steps. In order. No shortcuts.

Granting stock options for the first time feels like it should be simple: pick a number, put it in the offer letter, move on. It's not. There's a five-step compliance and governance sequence, and skipping any step creates downstream problems — some of which are expensive to fix and all of which surface at the worst possible time.

Here's the sequence, from first to last:

Step 1: Adopt an equity incentive plan

Your attorney drafts the plan (often called an EIP or Stock Option Plan). This document establishes the legal framework for issuing equity compensation: what types of awards can be granted (ISOs, NSOs, restricted stock), who's eligible, vesting schedules, exercise procedures, and termination provisions.

Most startups use a template their law firm provides, customized for the company's jurisdiction (usually Delaware) and tax structure. The plan must be adopted by the board and, in many cases, approved by stockholders. Your attorney handles this — it's legal work, not valuation work.

Step 2: Board approves the plan and option pool

The board resolution adopting the equity plan should also specify the option pool — the total number of shares reserved for future grants. Pool sizes typically range from 10–20% of fully diluted shares, depending on stage and investor expectations.

This step is important for the 409A because the option pool is part of the capital structure. The appraiser includes the entire pool (granted and unallocated) in the equity allocation model. If you expand the pool later, it may affect the FMV — more dilution generally means a slightly lower per-share value for common stock.

Step 3: Obtain a 409A valuation

This is where the fair market value of your common stock is established. The 409A must be performed by a qualified, independent appraiser and documented in a signed written report — the requirements for safe harbor protection under Treasury Reg §1.409A-1(b)(5)(iv)↗.

The appraiser needs your cap table, certificate of incorporation, financing documents, and financials. (See The Documents You Need for a 409A for the complete list.) A clean cap table is the single biggest accelerator — if your cap table is messy, the appraiser can't model the equity allocation accurately, and the engagement slows down.

Key insight: reconcile your cap table with your certificate of incorporation before submitting. The number of authorized shares, the conversion ratios, and the liquidation preferences in the charter must match what's in your cap table. Discrepancies between the two are the most common source of back-and-forth with the appraiser.

Step 4: Board adopts the FMV and authorizes grants

This is the step most first-time founders miss — and the one that creates the most problems during due diligence.

The board consent should specifically: (a) reference the 409A report by date and provider, (b) state the concluded FMV per common share, (c) formally adopt that FMV for purposes of granting options, (d) authorize specific grants under the equity plan to named individuals or a class of employees, and (e) set the exercise price equal to or above the FMV.

Without this board resolution, the grants may lack proper corporate authorization under state law (typically Delaware General Corporation Law §157↗). Investor counsel during a Series A will ask for the board consent supporting each grant. If it doesn't exist, they flag it as a governance weakness. Retroactive approval is possible but messy — and investors notice the gap.

Your cap table software won't prompt you to do this. It will let you create grants without a board resolution. The software tracks the grant; the resolution authorizes it. They're different things.

Step 5: Issue option agreements

With the FMV adopted and grants authorized, you issue individual option agreements to each recipient. The agreement specifies the number of shares, the exercise price (at or above the 409A FMV), the vesting schedule, and the expiration date.

The grant date is the date the board approves the specific grants — not the date the 409A was issued, not the date the offer letter was signed, and not the date the employee starts. This distinction matters because the 12-month safe harbor clock runs from the 409A valuation date to the grant date. If the board authorizes grants more than 12 months after the valuation date, those grants lack safe harbor — even if the employee signed the offer letter within the window.

The sequence matters

Steps 1 and 2 involve your attorney. Step 3 is your 409A provider. Step 4 connects the 409A to corporate governance. Step 5 is execution.

Express 409A covers Steps 3 and 4 in one package: the 409A valuation report (48-hour delivery) plus a pre-drafted board resolution and strike-price schedule. You handle Steps 1, 2, and 5 with your attorney and cap table tool. We handle the compliance-critical middle. (See You Can't Grant Stock Options Without This One Document for the full explanation of why each step matters.)