Stock options are an increasingly common asset in California. A stock option is the right to purchase a unit of stock at a specific price on a particular date. You may acquire options from your employer, who may give them to you as compensation, or you can purchase them on the open market.
When a California couple divorces, any investments acquired during their marriage are typically considered community property and thus subject to equal division. Here’s what that means for your portfolio.
How Stock Options Are Valued in California
Two scenarios lead to stock options being involved in a divorce. The first is relatively simple: the couple chose to invest in options on the open market. In this case, they may be valued according to either their original purchase price or the amount for which they’d sell on the market on the date of separation.
Alternatively, one spouse may have accrued options through their employment. These are known as employee stock options or ESOs, and they pose three significant complications during divorces:
- An ESO cannot be sold or transferred to a third party.
- ESOs take time to vest, and the owner cannot exercise their option to purchase until they vest.
- If the employee leaves the company before their ESOs vest, they become worthless.
These restrictions make valuing and dividing ESOs a complicated process.
3 Strategies for Dividing Employee Stock Options in Your Divorce
Depending on the couple, there are three general strategies for handling ESOs during a divorce:
- Split them down the middle. This is a straightforward solution, but it puts the person who didn’t earn the ESOs at risk. Their ex could quit their job and make the ESOs they received worthless.
- Negotiate an asset trade. A better alternative for couples who remain amicable is to negotiate a trade. They can estimate the value of the ESOs based on whether they’ve vested and the company’s overall success. They can then agree to grant the non-employee spouse a greater share of other assets equal to the value of their share of the options’ estimated worth.
- Use the Time Rule Formula. In contentious or particularly complicated splits, it may be necessary to use California’s Time Rule Formula to calculate the value of non-vested ESOs. This formula calculates how much of a non-vested asset is considered community or separate property. After performing the Time Rule calculation, the couple can split the community property share of the options equally or conduct a trade.
Complex assets like an ESO can have significant value for divorcing couples. However, the division process requires care and attention to detail if each spouse is to receive a fair share of the marital estate. If you’re preparing for a divorce and have complex property to consider, you are invited to schedule your consultation with the skilled attorneys at Viola Law Firm, P.C. Our experienced team can help you fairly divide even the most complex assets and achieve a fair divorce settlement.
