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A guide to dividing stock options in your divorce

| Jun 1, 2020 | Blog |

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Some assets are fairly simple to divide during divorce, like selling your car and splitting the profits. If you are dividing more complex assets such as stock options, you face unique challenges. Stock options that cannot be sold off to a third party or do not have a fair market value can be particularly confusing to divide.

If you are going through a California divorce and dividing stock options, keep reading to learn what you can expect.

Unvested options are subject to division

When your stock options vest, you can use your options to purchase shares at a fixed price stated in the original agreement. But sometimes, you might be dealing with options granted during your marriage that did not vest before you separated with your spouse. Although unvested options do not technically have any real market value, they are still divided during California divorces.

Division time rules

Dividing stock options in divorce can be accomplished by applying a special formula, known as a time rule. The most common time rules are:

  • The Nelson formula – For options used as incentives to stay and rewards for future performance.
  • The Hug formula –  For options used to attract people to the position and reward previous services.

The court will decide what formula to use based on why the stocks were granted, the date of hire, date of separation and date of vesting.

Distributing options

Upon the determination of the value of each stock, there are various ways to distribute them. For example, you can negotiate a trade-off in exchange for the stock options, transfer them into the name of your spouse or hold them in a constructive trust.

Make sure that all stock options related to your marriage are properly valued for a fair division process. Divorcing with complex assets requires special consideration and preparation. Speak with a family law attorney for guidance throughout your divorce.