The Importance of Good Legal Housekeeping (Part 2)

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In Part 1, we covered what good legal housekeeping looks like, why it matters, and how to build the foundational practices, including the minute book, board approvals, and conducting business properly through the entity. This post covers the more tactical side: what to keep your attorney informed about, the pitfalls that come up most often, and a practical annual checklist to keep your company on track.

Keep Your Lawyer Informed

Remember, your attorney can only help you if they know what’s going on. Here are a few things I always encourage clients to loop us in on:

Equity Issuances

This matters for several reasons. 

  1. First, corporations cannot issue more shares than are authorized in their charter. Exceeding that number creates a “putative share issuance,” which means those shares are legally void until corrected through a formal ratification process. 
  2. Second, restricted stock grants trigger the 83(b) election clock. There is a very strict 30-day deadline from the date of transfer to file, and there is no routine IRS remedy for missing it. 
  3. Third, option grants must be issued at fair market value, typically supported by a 409A valuation.

Employment and IP Matters

Ensure everyone who works for or with your company — employees and contractors alike — has a signed agreement with intellectual property assignment provisions. If someone builds something for your company without a proper IP assignment in place, that IP may not belong to the company. That is a significant problem in any diligence process.

Fundraising

Issuing SAFEs, convertible notes, or equity triggers federal and state securities laws and potential required filings on a federal or state level. 

Basic Company Changes

Changing your address, switching registered agents, or expanding into a new state all typically require filings and notifications. They seem minor, but overlooking them creates compliance gaps.

A good rule to follow is that if an action involves equity, investments, intellectual property, or people, assume your attorney needs to know about it. View any commercial, equity, or HR action as having a parallel legal action.

Common Pitfalls

Here are the issues that come up most frequently, and the ones that tend to have the most downstream impact:

Falling Out of Good Standing

Every state requires annual filings and franchise tax payments to maintain good standing. If those are missed, your entity can be voided or administratively dissolved. This happens more often than you’d expect, typically in the spring following a missed filing. Your registered agent will send a notice, so keeping your address current matters.

83(b) Election Failures

If a founder receives restricted stock and doesn’t file an 83(b) election within 30 days of the date of transfer, they’ll owe ordinary income tax on the stock as it vests rather than at the (usually much lower) value at the time of grant. There’s no routine IRS remedy for missing the window, so you’ll want to consult with your attorney about the available options.

Putative Share Issuances

If the cap table reflects more shares than the charter authorizes, those excess shares are void. The Delaware fix involves a formal ratification process under DGCL § 204 or § 205, including board and stockholder resolutions, an amended charter, and a Certificate of Validation. It’s solvable, but it takes time and money that could be avoided by keeping the cap table current.

Missing or Unexecuted Documents

Without a signature and date, it can be very difficult to establish that an agreement was actually finalized. It’s worth making a habit of confirming that every document is fully signed and dated before filing it away.

Messy Cap Tables

Promised equity that was never formally issued, options that were granted but never documented, and investors from prior rounds missing from the record can all create real complications in any financing or exit. Keeping it current is one of the highest-value habits a founder can build.

Annual Housekeeping Checklist

We put together an Annual Housekeeping Checklist PDF for notable items worth putting on your calendar every year.

Next Steps

If you’ve read through both parts of this post and realized you have some gaps, here’s a simple starting point:

  1. Confirm that franchise taxes were paid this year. Your law firm can run a good standing check for you.
  2. Review your cap table and make sure it’s current and that all promised equity has actually been issued.
  3. Start pulling together your minute book.
  4. Calendar your annual due dates, including tax filings, registered agent renewals, and quarterly legal check-ins.
  5. Make sure your registered agent has your current information in every state where you’re registered.

Founders who treat legal housekeeping as a routine part of running their business, rather than something to address when a deal forces the issue, tend to move faster, spend less on clean-up, and enter due diligence in a much stronger position.

If you have questions about where your company stands or would like to do a legal health check, feel free to reach out. We’re happy to help.

Posted in: Corporate Governance

About the Author(s)

Mattison Raiford Spaulding

Mattison Raiford is an attorney at Vela Wood. She represents clients in general business matters, with a focus on venture capital and mergers and acquisitions.

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