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What are stock options?

Stock options are a right given to one of the spouses to buy a company’s stock at a particular price. The right often requires a vesting period. Once the vesting period passes, the owner can exercise the options or hold them to see if the share prices will increase. Options often have an expiration date so you cannot hold on to the right to purchase at X price indefinitely. Stock options are common in California because of the number of startups and technology companies that are located here.  Some companies use Stock Options to purchase talent before the company is making revenue; others use stock options as a reward for a job well done, and others use stock options to retain high performers. Dividing stock options when spouses or partners divorce is a difficult task because it can be hard to determine the value of the stock option. It can be harder still to figure out the present day value of the options when the options may never vest, may be worthless when they vest, or may not be transferable to third parties.

Are stock options community property?

As with other assets in a community property state, the first determination that needs to be made is whether the stock option is community property or separate property. If the stock option was granted before the marriage started or after the date of separation, then the option is the owner’s separate property. If the stock option was granted during the marriage, then the option is community property and subject to division. How the options are divided depends on whether they are vested or non-vested at the time of division.

Vested stock options

Vested stock options are options that the owner has the present right to exercise. If you have vested but unexercised stock options, division of this asset will turn on the current market price for the shares and the option price to the owner. If the shares are worth more than the option price, then the couple will have property to divide. If the option price is higher than the market value at the time of your dissolution, then the issue is whether there is time for the price of the shares to increase before the option expires.

Non-vested stock options

Stock options do have value even though the employee may lose the options if he/she later leaves the company before the vesting date. In California, stock options in divorce cases are divided by using a formula. Which formula is used varies depending on the basis for the stock option in the first place. Was the option a reward for a job well done, a way of luring the worker to the company, or an incentive to keep the employee at the company? Two commonly used formulas are:

The Hug formula

This formula is used when the reason for the stock option is to reward the employee for past performance. To determine the Community property shares, you must determine the community’s interest and multiple that number by the number of shares owned. The community’s interest is determined by dividing the time between the date of hire and the date of marital separation by the time between the date of hire and the date the stock option vests.

The Nelson Formula

This formula is used where the primary purpose of the stock option is to entice the employee to stay with the company. To determine the Community property share, you must first community’s percentage of interest and then multiply that percentage by the number of shares that can be exercised. The community’s percentage of interest is determined by dividing the time between the date of the grant of the stock option to the date of separation by the time between the date of the grant of the stock option to the date the option can be exercised.

Can a Mediation Lawyer help us Divide Stock Options

Yes. As a licensed California Attorney and a Certified Mediator Amanda has the legal knowledge and the negotiation skills to help you amicably resolve your stock option disputes. To learn more about our Divorce Mediation services, give us a call at (925) 480-7850.

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