If a spouse earned stock options during the marriage, most courts will award at least a portion of the options, or the value of the options, to the other spouse in the event of a divorce. A stock option is the right to purchase a certain number of shares of a company’s stock at a pre-set price, usually the price of the shares on the date of issuance, at some future date. Stock options are frequently issued by an employer to certain employees as a form of compensation and as an incentive for the employee to work diligently in the best interests of the company. If the company’s stock rises, the employee will benefit financially.
Stock options are potentially valuable and therefore often become a property distribution issue in a divorce. However, there are certain conditions that often accompany stock options, such as vesting and limited transferability, that make it more difficult to value the options when trying to fairly divide them. Generally, a stock option must vest before the employee can exercise the option. Vesting is the time period, typically 4 or 5 years, that the employee must wait before he can purchase the shares in the company at the pre-set price. If the employee leaves the company before the stock options vest, the options are forfeited.
Due to the speculative nature of stocks, it would be unfair to divide the value of the stock options between the spouses based on the value of the shares at the time of the divorce, particularly if vesting is far in the future. For example, assume that the shares are worth $20,000 at the time of the divorce and, if vested, the employed spouse could purchase the shares for the pre-set price of $10,000, and the property division is 50/50. After accounting for the cost of exercising the options and purchasing the shares, it would be unfair for the non-employed spouse to receive half the value of the shares, $5,000, because the stock may not be worth that much, if anything, at the time of vesting, or the employed spouse may leave the company before the options vest. Under this scenario, the non-employed spouse would gain an unfair advantage.
Similarly, if the stock in the company rises dramatically following the divorce, and the shares are worth $100,000 at the time of vesting, the employed spouse would net $90,000 in profit after purchasing the shares for $10,000. The non-employed spouse would not be able to claim half of the profit because she accepted the $5,000 value of the shares upon divorce as compensation, and would lose out on a substantial amount of profit. This may be less problematic if the divorce occurs when the stock options are close to vesting because the value is more certain.
If the stock options permit, the spouses may opt to split the options between them. For example, if the options provide for a future purchase of 500 shares of the company stock, the options earned during the term of the marriage may be divided and each spouse will have the right to purchase 250 shares of stock at the time the options vest, assuming a 50/50 division. Any options issued to the employed spouse prior to the marriage or following the divorce would be considered separate property and not subject to division.
If the stock options are non-transferable, an alternative may be to agree that at the time of vesting, an agreed upon percentage of the options will be exercised and the proceeds given to the non-employed spouse. In this way, both spouses share equally in the risk. In any event, it is advisable to consult a financial expert who has experience in this area to make sure the stock options are valued and divided fairly.