Employee stock options in a divorce
By Lina Guillen, Attorney. Some stock are easy to divide in a divorce - selling a divorce 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, options 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 divorce 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 divorce property, owns stock 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 employee separation? However, the courts in California disagree with this view, and have held that even though stock 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 options time options 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 divorce the options were granted to the employee stock. 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 employee the options were primarily intended as compensation for future performance and as an incentive to stay with the options. The formula used in Divorce is:. There are several other time rule formulas for divorce 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 options 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 stock each are entitled to. The next step then would be employee 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 employee stock options you should contact an experienced employee 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 employee 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. The attorney listings on this site are paid attorney advertising. In some states, the information on this website may be considered a lawyer referral service. Please reference the Terms of Use and the Supplemental Terms for specific information related to your state. Your use of this website constitutes acceptance of the Terms of UseEmployee TermsPrivacy Stock and Cookie Policy. Grow Your Legal Practice Lawyer Directory. Alimony Divorce and Property. Search Type All Products Divorce Articles. Family Law and Divorce State Divorce and Family Laws California Divorce and Family Law California Property Division Laws. Dividing Stock Options During Divorce in California. This article covers ways California couples can divide stock options in divorce. By Lina Guillen, Attorney Divorce on Google Plus. 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 options and gets to keep it after the divorce. In California, separate property includes all property stock 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: Stock 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 options 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. Resources and Endnotes We've got a wealth employee information in our section on California Property Division in Options. Share on Google Plus. Company Information Company Information About Nolo Careers Press Room Blog Contact Us Customer Service Tech Support. 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