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Dividing stock options in a divorce

On Behalf of | Nov 6, 2023 | Divorce, Equitable Distribution, High Asset Divorce, High Net Worth Divorce |

Florida law calls for divorcing couples to divide their marital property equitably, meaning in a way that meets standards of fairness under state law. This process is known as property division, and it’s often the most technically difficult aspect of a divorce. And, as a general rule, the more assets a married couple owns, the more challenging the property division. This is particularly true when the couple owns complex assets such as real estate, retirement accounts and business interests.

One of the most challenging types of assets to divide in divorce is a stock option.

Stock options defined

Stock options are essentially contracts. There are several varieties of these contracts and their use, but in a typical scenario, an employer gives an employee an option to hold a number of shares in the company at a predetermined price during a predetermined time. Startups and other growing companies often give stock options as either forms of compensation or as incentives for future services.

These options can be vested or unvested.

When they are vested, the option holder can purchase the stocks. Ordinarily, the option gives them the right to buy shares at a price below their market value. Thus, if the company’s stock price is high, a stock option can be quite valuable. If the company’s share price has dropped below the predetermined price, the option is worthless.

When they are unvested, it means the time has not yet come for the purchaser to be eligible to buy the shares at the predetermined price. If they wish to do purchase shares before their options have vested, they must do so at the market rate.

Separate and marital property

When dealing with stock options in divorce, the first question is whether the options must be counted as part of the marital property. Generally, martial property consists of assets and debts acquired during the marriage, and anything acquired before the marriage is separate property. Separate property does not have to be divided in divorce.

However, when separate property has gained in value during the marriage, courts often consider this added value as part of the marital property, and therefore subject to division.

Stock options present special challenges in this analysis. For instance, a court’s decision might depend on whether the option was granted in compensation for work already performed or as an incentive to do more work afterward. It might also ask whether the vesting date of the options was during the marriage or after the separation.

For example, if the spouse began working for the employer during the marriage and later received the option as payment for their services, then a court would almost certainly decide that the entire option is subject to division in divorce. Things would be trickier if the employer granted the option as an incentive for future services and the vesting date is sometime after the divorce.

Dividing the option

If the parties have determined that the option is subject to property division, next they must figure out how to divide it.

If the vesting date has arrived, the parties may be able to exercise the option and then sell the shares. They can then divide the profit according to the terms of their settlement.

But if the vesting date has not yet arrived, they must arrive at an estimate of the option’s value. A good way to do this is to hire valuation experts (ideally one for each spouse) to estimate the value.

Next, the parties can decide whether to use deferred distribution (meaning that they will divide the profits if or when they exercise the option) or to have one spouse pay off the other based on the current valuation of the option. Perhaps needless to say, both options have risks and potential rewards for both spouses.

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