How to Divide Stock Options in a Divorce

2.CLASSIFYING STOCK OPTIONS IN DIVORCE.

Under the law of Equitable Distribution, which is North Carolina's method of dividing property in a divorce, all "assets" acquired during the marriage must be valued and divided. Assets acquired during marriage are typically classified as "marital assets," which allows the Court to value and divide them between the parties. Assets that are acquired prior to marriage, or after separation (or have specific legal classifications) are defined as separate and are not divided.

Therefore the first question with stock options is when were they acquired? Were the options earned during the marriage and prior to separation? If yes, then the options are marital property. In some cases the options are granted after separation for service performed before separation, and in this case the options would be defined as divisible, which means it will be treated as marital. If the options are marital, we need to consider the nature of the options.

3. VESTED OPTIONS Vs. UNVESTED OPTIONS.

As with many employee stock or profit sharing benefits, stock options often come with a "vesting schedule." These vesting schedules provide a grant of a number of stock options to an employee at one time, however limits the employees ability to exercise the options according to a schedule. A common example is a grant of 10,000 stock options on January 1, with a vesting schedule allowing the employee to purchase 25% of the grant every quarter throughout the year.

Some restrictions involve staying with the company for a period of time while others simply involve the passage of time. Both vested and non-vested options can be marital property and have value, so do not assume non-vested stock options are not part of the equation.

There are several accepted methods for valuing stock options in divorce depending on the state you live in. North Carolina uses the "Intrinsic Value Method." Fortunately the Intrinsic Value Method of valuing stock options is one of the more simple methods. The value of the current stock price is subtracted by the value of the option "strike price"(price spouse would have to pay to buy), then multiplied by the number of options. This method is useful for "common" stock where marketability and pricing are easily determined.

Several websites provide detailed financial information for publicly traded stocks for any given date. If you are dealing with a restricted or preferred class of stock,or stock that is not publicly traded, you will likely need to hire an accounting and valuation expert to determine the value using a more detailed method (Black-Scholes, Noreen-Wolfson variant, Kasouf, etc). The parties are always free to agree on value and this is often the best result so long as  you in a position to make a reasonable estimation of the value.

How do Divorce Courts actually divide stock options between a Husband and Wife? The fact is that it is almost impossible for a Court to literally divide stock options by giving half of the options to each party. Divorce lawyers do not ask courts to do it in most cases and Courts do not typically try.

Instead Courts will distribute the stock options to the employee spouse and that spouse will have the value assigned to the options in their asset column. This would have the effect of the other spouse being "owed" an asset(s) sufficient to offset the value of the stock options. As a North Carolina Divorce Lawyer for over 14 years, I have never seen a Court attempt to split up a grant of stock options between two parties.