Divorce proceedings can be highly complex, especially when dividing marital assets. Even in this complicated process, restricted stock units (RSUs) stand out as a challenge for divorcing spouses and their lawyers.
The question of dividing RSUs after divorce is particularly relevant in California, where many large Silicon Valley companies provide employees with RSUs as a form of compensation. This article will provide a quick yet comprehensive overview of what you need to know about RSUs during divorce proceedings in California.
Stock Options vs. RSUs: What’s the Difference?
RSUs are closely related to stock options; however, it’s important to understand the subtle yet meaningful differences between them.
- A stock option is a contract guaranteeing that the holder will be able to purchase a company’s stock at a particular price after a given date. This is particularly attractive for employees of growing companies, whose stock may be worth much more in the future than its current value.
- An RSU is a contract guaranteeing that the holder will be delivered a share of stock in the future, without the need to pay for them. Once the RSU vests, it is subject to taxation at ordinary income tax rates. RSUs are often used as “golden handcuffs” to encourage high-performing employees to remain at an organization.
Learn more about how RSUs are viewed by family law courts in California by downloading our white paper: Risky business: How California divorce law endangers your RSUs
How are RSUs Treated in California Divorce?
California is a “community property” state, which means that all assets acquired by the couple during their marriage are considered to be the property of both partners. As such, the topic of RSUs will need to be addressed during divorce proceedings, unless they are mentioned in the couple’s prenuptial agreement.
RSUs that were granted and vested during the marriage are a relatively simple case. The employee spouse can choose to sell the stock for its current value and split the amount with the non-employee spouse. Alternatively, the employee spouse can retain the stock and split the amount of its current fair market value with the partner.
However, because they are a form of delayed compensation, RSUs may not vest until after the couple’s date of separation. This presents complications for divorce proceedings in California:
- One option is to appraise the RSUs that have not yet vested by the date of separation and give the equivalent value to the non-employee spouse.
- Another option is to wait until the RSUs vest after the divorce and then split them according to the market value at that time.
- A third option is to use one of the formulas for dividing stock options and RSUs in California, which are described in more detail below.
The Hug Formula and the Nelson Formula
There are two main formulas that the courts in California developed to determine how RSUs are divided in divorce, the Hug formula and the Nelson formula.
Before going into detail about these two formulas, let’s define some terminology:
- HD: hire date (when the employee spouse started work at the company)
- SD: separation date (when the spouses separated)
- GD: grant date (when the RSUs were granted to the employee spouse)
- VD: vesting date (when the RSUs vest)
- n: the number of vested shares
The Hug formula is usually applied when the RSUs were intended as a reward for past performance, or as a persuasion tactic to recruit the employee spouse. It is calculated as follows:
(HD – SD)/(HD – VD) * n
The Nelson formula is applied when the RSUs were intended to incentivize the employee spouse to stay with the company, or to perform well in the future. It is calculated is as follows:
(GD – SD)/(GD – VD) * n
The topic of how to allocate RSUs during California divorce proceedings is a tricky one that usually requires expert advice. If you need more information about RSUs during divorce in California, contact the attorneys at Kaspar & Lugay, LLP, with a wealth of experience handling these complicated instruments in the context of property division.