Equity Audit

An equity audit is a forensic examination of who owns what and whether the company issued it correctly. Most companies accumulate errors over years—duplicate grants, vesting misrecalculations, missing amendments. An audit surfaces these before they blow up at IPO or acquisition.

What an equity audit covers

A full audit examines:

1. Capitalization table: Who owns what % of the company, including common stock holders (founders), preferred shareholders (VCs), employee options, and RSUs. The cap table must sum to 100%.

2. Option plan documentation: Does the plan exist? Is it properly adopted by the board and approved by shareholders? Are amendments documented?

3. Individual grants: For each employee, does a grant letter exist? Is the grant referenced correctly in the cap table? Is vesting recorded accurately?

4. Vesting accuracy: For vested employees, has the equity actually vested according to the grant letter? Are cliffs correct? Are monthly vestings calculated properly?

5. 409A compliance: For private companies, are exercise prices and grant date prices supported by a 409A valuation? Are there potential 409A violations (grants at below fair value)?

6. Tax documentation: Are Form 3921s (ISO disclosures) issued for ISO grants? Are Form 409A valuations documented and filed?

7. Foreign employee issues: Non-US employees often have tax complications (different withholding rules, local law issues). Are these tracked?

8. Equity transactions: Any stock sales, transfers, or assignments recorded correctly?

Why audits happen

Before IPO: Underwriters and auditors require a clean equity record. Sloppy records are a red flag and slow the IPO process. An audit finds errors before they’re disclosed to regulators.

Before acquisition: The buyer’s counsel (diligence team) will scrutinize the cap table. Errors discovered during diligence can be deal-killers or cause deal price to be renegotiated downward.

Proactively: As a company scales (especially post-Series C), hiring a cap table specialist and doing an annual audit prevents accumulation of errors.

After a crisis: If an employee or investor questions their equity grant, an audit might be commissioned to settle the dispute.

Common errors found in audits

Vesting miscalculations: An employee’s grant letter says “four-year vest, one-year cliff,” but they were actually credited with 25 months of vesting (cliff hit, then monthly vests for 13 months instead of 36). The employee is owed equity they didn’t receive.

Missing documentation: A grant was made verbally or via email, but no formal grant letter exists. The board has no record. The employee claims they were promised 10,000 shares; the cap table shows 8,000.

Double-grants: An employee received two grants in the same time period (perhaps the company reissued after an amendment). The cap table reflects both. The employee has twice the expected equity.

409A violations: Options were granted at $2/share, but a 409A valuation later found fair value was $20/share. The options are non-compliant and trigger adverse tax consequences.

Unvested shares shown as vested: A data entry error caused an employee’s entire four-year grant to be marked vested on day one. If the employee left, they would receive far more equity than entitled.

Missing refreshes: Refresh grants were issued verbally or promised by a manager, but never formally recorded. An employee thinks they have 15,000 vested shares; the cap table shows 10,000.

The audit process

1. Engagement: Company hires an audit firm (usually a specialized cap table firm, law firm, or accounting firm).
2. Document gathering: Auditor requests all grant letters, 409A valuations, board resolutions, option plan documents, vesting records, and cap table versions.
3. Review: Auditor compares documents to the current cap table. Tests vesting calculations. Checks 409A compliance.
4. Findings: Auditor produces a report listing errors, gaps, and recommendations.
5. Remediation: Company and employees work to correct errors (amendments, catch-up vesting, etc.).
6. Certification: Auditor confirms corrections; cap table is deemed “clean.”

Cost and timeline

A basic audit for a 50-person company might cost $20k–$40k and take 4–8 weeks. A complex audit (100+ employees, multiple plan types, foreign workers, or significant errors) can cost $100k+ and take months.

The cost is usually borne by the company, but in some cases (post-acquisition disputes), the buyer and seller share the cost or dispute it as part of closing mechanics.

The audit report

An audit report typically:

1. Summarizes the company’s equity structure.
2. Lists all errors and discrepancies found.
3. Quantifies the impact (how much equity was incorrectly vested, who is affected).
4. Recommends corrections (amendments, catch-up vesting, etc.).

A clean audit report is a selling point to potential acquirers or IPO underwriters. A report full of findings suggests management failure and creates deal friction.

Red flags discovered in audits

• Founder cap table discrepancy: The cap table shows founder A owns 25% and founder B owns 25%, but founder C has no record. Suggests incomplete equity documentation at the founding.
• Large vesting errors: Employees systematically vesting wrong amounts (all off by the same margin) suggests the company’s vesting calculation process is broken.
• Missing 409A support: Options granted without 409A valuations, especially at private companies. Tax risk.
• Key employee missing from cap table: A VP who’s been there three years has no recorded grant. Suggests grants were made orally and never documented.

These findings often require legal remediation (formal amendments, letters confirming vesting corrections) before they’re resolved.

Who should do the audit?

• Cap table specialist firms: Carta, Pulley, SharesPost. Specialize in equity admin and audits.
• Law firms: Corporate/tax practitioners who specialize in equity compensation.
• Big Four accounting firms: For companies preparing for IPO (they’ll do it as part of IPO audit anyway).
• Internal process audit: Smaller companies sometimes audit themselves (DIY), though this misses many issues.