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Divorce, Division Of Stock Options And Rsus

Over 185 Years of Combined Experience in Family Law




Division Of Stock Options And RSUs

Stock options and restricted stock units (RSUs) are sometimes offered to employees as a form of compensation or as a performance incentive. In California, many technology companies, including startups, provide these incentives to hire or retain deserving employees.

If you or your spouse received stock options or RSUs during the course of your marriage, or these instruments became fully or partially vested while you were married, they could be divided as community property in the event of divorce.

In a situation where you or your spouse receive a grant of stock options or RSUs that vest in part during marriage and the remainder part vests after your separation, the former portion will be treated as community property.

Even if you received stock options or RSUs prior to your marriage, but they became vested during marriage, they will usually have a community property component. Depending on what formula the Orange County family law court applies, it will be determined how many of your options get characterized as community or separate property.

Understanding RSUs

RSUs or restricted stock units are a popular form of deferred compensation, which has been embraced by many Silicon Valley technology companies and startups. These companies typically have a long gestation period before they can start producing high returns and pay high salaries. Therefore, to attract top talent, they may offer this type of compensation where the employee can expect to be well-compensated when the company makes profits and its valuation increases.

RSUs are also used as an incentive to retain talent because you may like to stay with the company at least until the stocks have vested. In a legal sense, RSUs are an issuer’s promise to give stock options to beneficiary after certain pre-conditions are fulfilled. RSUs are “restricted” because the vesting schedule may be based on performance milestones or the length of employment.

The recipient may also be restricted from transferring or selling the shares for a certain time period after they are vested. A key difference between stock options and RSUs is that if the market value of the company goes down, the value of the stock option may also go down and even fall to zero.

But in case of RSUs, once the stocks have been vested, the RSU will carry some value even if the market price of the stock declines. However, if you leave the company before all the RSUs have been vested, the unvested portion will normally get forfeited.

Division Formulas Used in a California Divorce

In a California divorce, the court may usually apply the Nelson or Hug Formula to divide stock options and RSUs. Both these formulas are derived from the time rule, which focuses on the total period of earning and what part of the period occurred during the course of marriage. In other words, the marital percentage of the stock options and RSUs may have a community property component.

Hug Formula to Determine the Community Component of RSUs

The Hug Formula takes into account the fact that RSU is a form of deferred compensation given as a reward for the employee’s past performance. The community component of this compensation will be calculated as follows:

< Time period between start of employment and end of marriage Divided by or (/) Time period between start of employment and vesting of the stocks >

The community property figure derived from this division is then multiplied by the actual number of stocks that have been harvested. This final amount is split 50/50 between the two parties.

Nelson Formula to Determine the Community Component of RSUs

In a California divorce, the Nelson Formula takes a view that the stock options or RSUs earned by an employee are a financial incentive given for their future performance. Therefore, the community component of this compensation will be calculated as follows:

< Time period of employment between the date of issue of shares and the date of marital separation
Divided by or (/)
Time period between the date of issue of shares and the date when the stock options became first exercisable >

The community property figure derived from this division is then multiplied by the actual number of stocks that have been harvested. This final amount is split 50/50 between the two parties.

Other Aspects to Consider

Both parties will get the opportunity to determine which of the two formulas they want to apply for the division of stock options and RSUs. In certain cases, the parties may agree to negotiate the amount of RSUs that should be considered as community property, so that the non-employee spouse can be reimbursed with a payment.

In a few cases, both sides may agree to wait till the time the RSUs become vested and can be sold off in the market. That will provide their full value as well as an accurate valuation for the purpose of division. However, if you want a complete financial break from the other party at the time of divorce, you may want to avoid going down this path.

Discuss Your Best Options with a Knowledgeable Divorce Lawyer

The value of stock options and RSUs over time can be far more than what you may be thinking. You need to carefully evaluate all the financial and legal elements of these complex assets and determine your best possibilities for a property division.

A resourceful divorce attorney may utilize the expertise of a CPA or financial advisor, depending on the size and complexity of these assets. Choose a lawyer who can successfully protect your interests when it comes to the division of stock options and RSUs in an Orange County divorce.

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