Divorce
Getting divorced is likely to have a large impact on your stock-based compensation
How Getting Divorced Impacts Your Stock-Based Compensation
Getting divorced is a challenging life event to go through. Amongst other decisions being made, a lot of time is typically focused on how marital assets will be divided and if/how future compensation will be divided (i.e. alimony). If you're going through a divorce process we detail below some key items you make consider or want to be aware of as you go through the process, but defer to your legal counsel on all items.
If you're getting divorced, we strongly recommend you seek legal counsel for how it will, or may, impact your stock based compensation. The details below are provided for informational purposes only.
Stock Comp Vested When Married is Usually Considered Marital Property
As implied in its name, stock-based compensation is by and large considered compensation. And as such, any vesting or ownership stake you accrue when you were married is likely to be considered marital property. Conversely, any vesting or ownership stake you accrued prior to being married, is typically considered pre-marital property.
How this distinction impacts the division of vested and granted but unvested stock based compensation depends on a number of circumstances. In most cases, it's part of the financial discussion and agreement between two divorcing individuals, and informed by state laws and pre-existing agreements (if any).
Additional Important (or Potentially Important) Factors
As noted above, there are some general rules regarding how stock-based compensation vested during marriage is generally treated; but divorce can also be a complex process. How two divorcing individuals discuss, value, and agree to handle stock-based compensation holdings can vary materially. That said, if you're an individual who is going through (or anticipates going through) a divorce proceeding where at least one individual in the marriage has stock-based compensation, the items below are important to be aware of:
Valuation of Pre-IPO stock. Pre-IPO stock can have a number of different valuations, including the 409a valuation, latest VC preferred valuation, as well as potentially other inputs (e.g. secondary market transactions). The division of assets in a divorce frequently hinges on the valuation of certain assets, so understanding the nuance here is important.
Do you have a marital agreement (pre-nup or post-nup)? If you and your spouse executed a marital agreement, that agreement most likely addresses how stock-based-compensation should be treated. Presuming that it is addressed in the document, how your marital agreement specifies it is to be handled should determine its outcome.
Is your state a community property or separate property state? Community property and separate property states have major differences in regards to how the states laws consider and address stock-based-compensation. By and large, there is a general presumption that all assets (including stock comp) acquired after the date of marriage in a community property state are marital community assets.
State laws. The major state law difference is noted above (i.e. community property vs. separate property state), but there can be a number of different individual state laws and statutes that impact how marriage can impact your stock comp as well.
Actual vesting vs. time earned. In certain circumstances, how long you vested into a particular grant vs. the actual vesting date can matter as well. For example, if you were married 1 day prior to the vesting date of a large vesting date (e.g. crossed the 1 year cliff of an initial hire grant), the percentage of the time of that vesting in which you were single versus married could potentially be considered.
Granted but unvested stock-based compensation. In addition to considering the division of vested stock compensation or company shares, divorce proceedings also frequently will address shares that will vest in the future. This can be part of alimony conversations, or even part of asset division conversations depending on when the grant was issued and how vesting will occur.
Type of stock comp (e.g. ISOs). ISOs are a type of stock option that can only be granted to, and owned by, an employee and as such cannot typically be split in a divorce proceeding. How ISOs are treated in a divorce due to this restriction may vary in multiple ways.
If ISOs have been exercised, stock is owned and those shares should be able to be divided.
Depending on company policies, a portion of the option may be able to be transferred to a former spouse, but lose its preferential ISO structure and instead become a NSO.
A former spouse may have a right to a certain portion of ISOs that are held in the name of the employee, but the former spouse can request that they be exercised and shares transferred (this gets messy; but we've seen it).
Allocation Calculations/Formulas
As noted above, stock options are likely to be considered marital property if either (1) employment began during the marriage, or (2) a grant is made as compensation for past work. That said, it may not always be easy to understand and calculate exactly how a grant should be divided in certain scenarios. Different attorneys and states favor different methods, but two of the more commonly used formulas used to calculate this are:
The Nelson Time Rule
The Nelson time rule divides nonvested stock options into two groups: (1) marital property, and (2) separate property.
The numerator is the number of days from the start date (grant date or marriage date) to the ending date (separation date or divorce date)
The denominator is the number of days from the grant date to the vesting date
The result (numerator/denominator) specifies what percent of the assets should be considered martial versus separate property
The Hug Time Rule
The Hug time rule divides nonvested stock options into two groups: (1) marital property, and (2) separate property.
The numerator is the number of days from the start date (employment start date or marriage date) to the ending date (separation date or divorce date)
The denominator is the number of days from the employment date to the vesting date
The result (numerator/denominator) specifies what percent of the assets should be considered martial versus separate property
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