Dividing up your lives in a divorce also means that you and your spouse have to divide up the marital property as equitably as possible. That can get very complicated when those assets include stock options held by one or both spouses.
Stock options are often given as deferred compensation to highly placed employees, and they can become quite valuable. Here are some of the things you need to know about how they’re handled in a divorce:
When are stock options part of the marital estate?
Generally speaking, it doesn’t matter so much if the stocks are vested (able to be exercised) or nonvested (eligible to be exercised only at some future point), but whether they were given for work that occurred during the marriage.
Any stock options that were given for past or present services are likely to be deemed marital property. Those awarded solely in anticipation of future work will probably be separate property.
How are the stock options valued?
Determining the value of any stock options that need to be divided is another tricky process. Several different methods are possible, including:
- The Intrinsic Value Method: This is a relatively simple method that subtracts the strike price of an option from the current stock price, multiplied by the quantity of stocks the holder owns. Basically, this looks at how much value the stocks would have if the options were exercised right now.
- The Black-Scholes Formula: This is a more complicated method of valuation that looks at everything from the historical data of the stocks in question, the vesting schedule and the strike price. While there are tools available that can help you get an estimated value, this kind of calculation may take the skills of a forensic accountant to get right.
You may not even realize that your spouse is holding onto stock options – and they may not exactly be in a hurry to mention them. That’s why it’s critical to make sure you have a complete discovery process and experienced legal guidance by your side as you uncover what stock options are there and decide how they should be valued.