Restricted stock units (RSUs) and stock options are common forms of equity compensation in technology companies and startups, especially in Silicon Valley and the Bay Area. These assets can represent a substantial portion of one’s wealth and become a complex, high value issue in divorce.
Kaspar & Lugay LLP specializes in high asset divorces involving RSUs, stock options, and other equity compensation. Our team of attorneys and founding partners, Arvin Lugay and licensed CPA Brent Kaspar, combine elite family law expertise with a deep understanding of the financial side of California’s startup ecosystem. We are uniquely equipped to handle complex issues in high net worth divorces to ensure accurate valuation and fair division in your divorce settlement.
What Are RSUs and Stock Options?
RSUs and stock options are stock-based incentives issued to employees as part of their overall compensation package.
RSUs are a promise to grant company shares to an employee once certain conditions are met. These conditions are usually time-based (continued employment over a set period) or milestone-based (individual or company performance). Once the conditions are met, the RSUs are vested and (typically automatically) settled, meaning the RSUs are converted into shares and distributed to the employee. RSUs are commonly vested on a quarterly or annual vesting schedule, which means that the employee does not receive all of their promised shares at once. Once the shares are distributed, they are considered taxable income and assigned a fair market value.
Stock options are also subject to specific conditions and a vesting schedule. Vesting gives the employee the right (not obligation) to purchase company shares at a predetermined exercise price, regardless of the current market value. Exercising stock options can have tax implications, which vary depending on whether the options are non-qualified stock options (NSOs) or incentive stock options (ISOs).
Separate vs. Community Property in a California Divorce
California is a community property state, which means that any assets and debts acquired during your marriage are generally considered community property. Community property, also often referred to as marital property, is divided equally between spouses upon divorce. Separate property includes assets acquired before marriage as well as gifts or inheritances received during marriage.
RSUs and stock options may be treated as a mix of community and separate property.
- If vesting and distribution happened before the start of marriage, the shares would be considered separate property and not subject to division upon divorce.
- If the RSUs or stock options were vested and distributed during the course of marriage, these shares could be considered community property and subject to California community property laws.
- If the RSUs or stock options are unvested, a portion may be considered community property if they were issued during marriage.
Calculating The Community Property Portion of Equity Compensation
To determine what percentage of your equity compensation should be treated as community property, the courts typically use either the Hug formula or Nelson formula.
- The Hug formula applies to RSUs and stock options awarded as compensation for past work or performance. To calculate the community property portion, the time from the hire date to separation date is divided by the time between the hire date and vesting date.
- The Nelson formula applies to RSUs and stock options granted as an incentive for future performance. The time from the grant date to separation date is divided by the time between the grant date and vesting date.
Key Challenges In Determining The Economic Value Of RSUs & Stock Options
Currently, no specific state legislation or court rulings simplify the process of valuing RSUs and stock options. The complexity of each case demands a meticulously tailored approach. Working with an experienced family law attorney with a strong background in accounting is essential for navigating the challenges of equitable property division.
First, individuals are required to provide detailed financial disclosures of all assets during divorce, but it is unfortunately not uncommon for a spouse to misrepresent or conceal their equity compensation. Second, the vesting and distribution schedules of RSUs and stock options make methodical accounting and analysis necessary to correctly trace the number of units issued and calculate what percentage are subject to community property division. Third, accurately assessing the economic value of both vested and unvested equity compensation requires careful consideration of vesting schedules and market trends that could dictate the future value of the shares.
A Financially Skilled Lawyer Is Key To Accurate Valuation & Fair Division In A High Asset Divorce Settlement
A California divorce attorney who is also a financially skilled, licensed CPA can:
- Request comprehensive financial disclosure from both parties and, when necessary, issue subpoenas to obtain financial records from banks, investment firms, and other financial institutions.
- Question the other party under oath about their finances. Any false statements made in deposition carry potential legal consequences.
- Partner with forensic accounting experts to uncover hidden or “forgotten” assets.
- Accurately determine the value of your RSUs and stock options in terms of both current value and future potential.
- Calculate what portion of your equity compensation is community property by applying the correct legal formula.
- Carefully inventory your stock portfolio, determine its wealth and tax implications, and guide informed decision-making throughout the negotiation process.
Book A Confidential Consultation Today
Kaspar & Lugay LLP understands what is at stake for business owners, entrepreneurs, early employees, high level executives, and company founders. We work diligently to ensure that your assets are protected and divided properly in accordance with California law.
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