By Lina Guillen, Attorney. Some assets are easy to divide in a divorce - selling a car and dividing the profits is usually a no-brainer. Dividing stock options, however, can present a unique set of challenges. However, California courts have determined several ways to deal with the division of stock options in divorce.
One spouse lands a great job working for a start-up company, and as part of the compensation package, receives stock options subject to a four-year vesting schedule. The couple is unsure whether the start-up will continue as is, be acquired, or fold up like many other companies in the Valley.
The couple later decides to divorce, and during a discussion about the division of assets, the stock options come up.
They want to figure out what to do with the options, but the rules are unclear. First, they will need to understand some of the foundations of marital property rights in California. Separate property is not part of the martial estate, which means the spouse that owns the separate property, owns it separately from their spouse not jointly and gets to keep it after the divorce.
Separate property is not subject to division in a divorce. In California, separate property includes all property that is acquired by either spouse:. The date of separation is the date that one spouse subjectively decided that the marriage was over and then objectively did something to implement that decision, such as moving out.
Many divorcing couples argue over the exact date of separation, because it may have a major impact on which assets are considered community property and thus subject to equal division or separate property.
For example, stock options received before the date of separation are considered community property and subject to equal division, but any options or other property received after that date are considered the separate property of the spouse that receives them. They now have to determine how this might impact the division. But what about those options that were granted during marriage but had not vested before the date of separation?
However, the courts in California disagree with this view, and have held that even though unvested options may not have a present fair market value, they are subject to division in a divorce. So how does the court determine what portion of the options belong to the non-employee spouse? Two of the main time rule formulas used are the Hug 1 formula and the Nelson 2 formula. Before deciding which formula to use, a court may first want to determine why the options were granted to the employee e.
The Hug formula is used in cases where the options were primarily intended to attract the employee to the job and reward past services. The formula used in Hug is:. The Nelson formula is used where the options were primarily intended as compensation for future performance and as an incentive to stay with the company. The formula used in Nelson is:. There are several other time rule formulas for other types of options, and the courts have wide discretion in deciding which formula if any to use, and how to divide the options.
Generally speaking, the longer the time between the date of separation and the date the options vest, the smaller the overall percentage of options that will be considered community property. However, if the options vested several years after the date of separation, then a much smaller percentage would be considered community property.
After application of either time rule, the couple will know how many options each are entitled to. The next step then would be to figure out how to distribute the options, or their value. Here are a few of the most common solutions:. This area of family law can be quite complex. If you have questions about the division of stock options you should contact an experienced family law attorney for advice.
We've got a wealth of information in our section on California Property Division in Divorce. Marriage of Hug Cal. Marriage of Nelson Cal. The information provided on this site is not legal advice, does not constitute a lawyer referral service, and no attorney-client or confidential relationship is or will be formed by use of the site.
Alimony Divorce and Property. This article covers ways California couples can divide stock options in divorce. Separate Property Separate property is not part of the martial estate, which means the spouse that owns the separate property, owns it separately from their spouse not jointly and gets to keep it after the divorce. In California, separate property includes all property that is acquired by either spouse: Dividing the Options So how does the court determine what portion of the options belong to the non-employee spouse?
The Hug formula The Hug formula is used in cases where the options were primarily intended to attract the employee to the job and reward past services. The formula used in Hug is: The formula used in Nelson is: Distributing the options or their value After application of either time rule, the couple will know how many options each are entitled to.
Here are a few of the most common solutions: The non-employee spouse may give up the rights to the stock options in exchange for some other asset or cash this will require an agreement between the spouses as to what the options are worth - for public companies, stock values are public and can form the basis of your agreement, but for private companies, this might be a little more difficult to determine - the company may have an internal valuation that can provide a good estimate.
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