Your cap table is the first thing diligence breaks

Buyer’s counsel will not take your spreadsheet as proof. They rebuild ownership from formation forward, issuance by issuance, and reconcile it to the share count in the purchase agreement. Every gap gets priced, escrowed, or offset against your seller note. Reconcile the ledger, paper every promise, and cure defective issuances before a letter of intent exists.

What does buyer’s counsel actually verify in a cap table?

Buyer’s counsel verifies authorization, not arithmetic. For each issuance they want the board approval, any stockholder or plan approval required, the consideration actually paid, and a certificate or ledger entry recording the result. The rebuilt total must equal the number in your capitalization representation. If it does not, that number changes, and so does what you clear.

Selling assets rather than stock lightens this review but does not end it. The buyer still needs proof that whoever signs had authority to sign, and an unrecorded claimant can still stall your signature page.

Delaware’s ratification statute names the failures that occur in practice. A failure of authorization means the act was never authorized in compliance with the statute, the charter, the bylaws, or an agreement the company signed, or the board or an officer never approved what needed their approval. Overissues count too. That covers almost every cap table problem a closely held company has. It governs only if you incorporated in Delaware; if not, read your own state’s statute.

So the document request is predictable:

• The charter or articles and every amendment.
• Minutes and consents authorizing each issuance, grant, and transfer.
• The ledger, certificate stubs, and canceled certificates.
• Subscription agreements and proof the money cleared.
• The equity plan, every grant notice, exercise, and repurchase.
• Stockholder and buy-sell agreements, joinders, spousal consents.

Law: 8 Del. C. 204(h)(1)-(2).

Which cap table defects show up most often at this size?

Five defects recur in privately held companies: an option promised in an email with no plan and no board action, shares promised to a key employee and never issued, a former partner or ex-spouse still on an uncanceled certificate, equity priced without the required valuation, and restricted stock with no timely Section 83(b) election.

What happens if nobody filed the 83(b) election within 30 days?

Restricted stock means shares the recipient owns now but can forfeit by leaving before vesting. A Section 83(b) election tells the IRS to tax him at grant on today’s value instead of at each vesting date on tomorrow’s. It must be filed no later than 30 days after the transfer. No late election.

The IRS released Form 15620 in November 2024, standardizing what had been a self-drafted letter, and in 2025 added electronic filing through its website; the current version is revision 4-2025. The form is a convenience, not a requirement, and the deadline did not move. An election cannot be revoked without IRS consent.

Now the application. Your key operator got restricted stock three years ago. Nobody filed. The shares vest in full on a change of control, which is what your sale is. The spread over what the operator paid is ordinary compensation income at closing, and your company owes income and employment tax withholding on it.

Consequence: in a stock or interest sale the buyer takes the company with that exposure inside it and prices it. In an asset sale it stays with your entity and with you, and the buyer wants an indemnity anyway. This is not a defect you repair. It is a fact you quantify first, in writing.

A missed 83(b) election is the one cap table problem you cannot outrun with paperwork. Most of the rest can be cured. This one can only be disclosed and priced.

Tax positions here are stated as of September 2026. Confirm the current form before anyone files.

Tax: 26 U.S.C. 83(b); Treas. Reg. 1.83-2, -2(f); IRS Form 15620 (Rev. 4-2025); Rev. Proc. 2006-31.

What is the risk of granting options without a current valuation?

An option escapes the deferred compensation rules only if its exercise price is at least the stock’s fair market value on the grant date. Price it below that and Section 409A treats the option as deferred compensation. The holder faces income at vesting, an additional 20 percent federal tax, and a premium interest charge.

Pricing is one condition, not the only one. The exemption also assumes the option is on your own stock, covers a fixed number of shares, and defers nothing beyond exercise. A discounted option meant to be an incentive stock option loses that status too. The 20 percent is federal; some states add their own.

Plans require a valuation before grant. The failure pattern is ordinary: grants priced off last year’s valuation, or off a number that felt right. The notices look fine. The pricing does not.

Consequence: your optionholders carry a personal tax problem your company created into a closing where their options are cashed out in full view. IRS correction relief for a discounted option is narrow and generally does nothing for insiders. Have the valuation behind every grant date ready.

Tax: 26 U.S.C. 409A; Treas. Reg. 1.409A-1(b)(5). Stated as of September 2026.

Can a defective share issuance be fixed after the fact?

Usually yes, if you are a corporation, and Delaware built the machinery. Under Section 204 of the Delaware General Corporation Law, the board can adopt resolutions ratifying a defective corporate act or a putative stock issuance. Under Section 205, the Court of Chancery may validate one, in its discretion. Other states differ, so check yours.

Board resolutions are not always the whole job. If the act would have required stockholder approval when taken, the ratification needs it too, from the holders of valid stock entitled to vote when the board adopts the resolutions. The Model Business Corporation Act added a ratification subchapter, Sections 1.45 through 1.52, in 2016, and a growing number of states have enacted a version of it or of Delaware’s. Many have not. Without a statute, your cure is consent from the affected holders.

Section 204 has real requirements. A certificate of validation gets filed where another section required one for the act and it was never filed or now needs amending. Notice goes to current holders of valid and putative stock and to those who held either when the defective act occurred, unless their identities or addresses cannot be determined from the records.

The notice must state that any challenge has to be brought in the Court of Chancery within 120 days of the later of the validation effective time and the date notice is given. Skip a holder you had to notify and you have not bought that peace.

Two limits matter. Ratification does not reach everything. In one Court of Chancery decision, restricted stock was void rather than voidable because recipients never signed the joinder the stockholders agreement required, and that agreement declared a non-complying issuance void from the start. Read your own agreements for that language. And Section 204 cannot undo a stockholder vote that rejected the deal, as the court held where the majority common stockholder had refused to approve a financing. Later amendments confirmed that acts merely unauthorized do remain ratifiable.

One more point for LLC owners. Delaware amended its LLC and partnership statutes in 2021 to let void or voidable acts be ratified and agreement requirements waived. Approval has to come from the people whose approval was needed in the first place, or who could amend the agreement to allow the act. It is a consent mechanic with no board-only shortcut. Your cure gets negotiated with members who now know a sale is coming.

Law: 8 Del. C. 204, 205; 6 Del. C. 18-106(e), 17-106(e), 15-202(g); Model Business Corporation Act 1.45-1.52 (2016 Revision); Southpaw Credit Opportunity Master Fund, L.P. v. Roma Restaurant Holdings, Inc. (Del. Ch. Feb. 1, 2018); Nguyen v. View, Inc. (Del. Ch. June 6, 2017).

Why does cap table cleanup have to start before a letter of intent?

Cap table cleanup starts early because ratification runs on a calendar you do not control. Board resolutions are the fast part. Locating former holders, sending statutory notice, filing any certificate of validation, and waiting out the 120-day challenge window are slow. A cure begun at signing is not quiet by closing.

Leverage is the second reason, and the bigger one. Before a letter of intent, the former partner whose signature you need has no idea a sale exists. His signature is a favor. After it, the same signature is a condition to your closing.

Ratification is a process with notice obligations and a waiting period, not a signature you collect the week the letter of intent arrives.

If your buyer is borrowing through the SBA 7(a) program, add lender time. Change-of-ownership loans are underwritten to SOP 50 10 8, effective June 1, 2025, which restored a 10 percent minimum equity injection and counts a seller note toward it only on full standby, and only in part.

Program guidance: SBA SOP 50 10 8, effective June 1, 2025.

What does an undocumented equity promise actually cost you?

An undocumented equity promise costs you money at closing, not a lawsuit. Buyers rarely litigate whether your operations manager was promised five percent in 2019. They price it. At this size that lands as an escrow, a lower price, or an offset against your seller note until the claim is resolved.

The promise is worth nothing while the business is illiquid. It becomes real money the moment the price is knowable and the claimant can see it. That is also when he can most easily slow your closing.

Consequence: you pay for informality twice. Once in the holdback. Once in the discount taken for uncertainty the buyer cannot size.

How do you reconcile the ledger to the certificates?

Reconciling the ledger to the certificates means proving that every share the ledger says exists is backed by an authorized issuance, and that every certificate ever printed is either outstanding in the right name or physically canceled and in the file. Work certificate number by certificate number, from number one. Gaps are the finding.

• Lay every stub and canceled certificate out in numerical order. If your shares are uncertificated, the ledger and the holder notices carry the proof.
• Match each stub to a board approval and to proof the consideration was paid.
• Chase every transfer. A divorce decree rarely moves shares by itself. Someone had to sign a stock power and someone had to record it.
• Confirm the authorized share count covers everything outstanding plus everything reserved. An overissue is ratifiable in Delaware, but expect a stockholder vote and a charter amendment.
• Check whether any lender took a pledge of the shares. The release belongs in the closing set.
• List every equity conversation that never became a document. Close each one in writing.

What should you do in the next thirty days?

Spend the next thirty days establishing what is true, not what you believe. The output is a reconciled ledger, a list of defects ranked by curability, and a start date for any ratification you need. Do this while no buyer exists, because the price of every signature rises the moment one does.

• Assemble the corporate record: charter, bylaws, minutes and consents, the ledger, all certificates, all grant documents.
• Build the reconciliation yourself, and mark every line you cannot support with an approval.
• Confirm, for each restricted stock grant, whether an 83(b) election was filed inside 30 days. Ask for the mailing receipt or electronic confirmation, not the recollection.
• Pull the valuation behind the exercise price of every grant. Note any grant date with nothing behind it.
• Identify every former holder a ratification notice would have to reach, and find them now.
• Decide the disposition of every informal equity promise, and paper the decision.
• Where an issuance is defective, begin any available ratification now, so the notice is out and the challenge window is running, ideally closed, before a buyer arrives.

A clean cap table does not raise your price. A broken one lowers it, twice, where you have the least room to argue. Fix it before anyone has leverage over the answer.