What Are Stock Options?

by Miod and Company

Of the many types of equity-based compensation programs, stock options are perhaps the most likely to arise. It’s important to note that laws surrounding stock options in divorce cases have undergone, and continue to undergo, a lot of changes. 

Due to stock option backdating abuses discovered in the early 2000s, new thought has had to be introduced to laws relating to these cases. As such it’s important to understand the laws as they relate to your cases as they exist at the time of said cases. However, there are a few things that you can probably count on regarding stock options in divorce cases.

First off, let’s set a definition of stock options. Stock options are an award given to an employee granting them the right to buy x number of stocks in whatever company. They’re derivatives: they derive their value from another value, in this case, the stock to which the option is assigned.

There are different types of stock options, but that’s the gist of it.

When attempting to address stock options as a marital asset, the following questions must be answered.

  • Are the options, in fact, marital property?
  • Are they vested?
  • Will they be valued?
  • How will they be divided?
  • What are the tax implications?
  • Will they be considered an asset, income, or both when calculating spousal and child support?

The answers to these questions depend on the state of jurisdiction; some states have specific laws, others leave it a little more in the air.

Most states recognize stock options as marital assets, though you should check your state’s laws. Options gained during the marriage are almost universally agreed upon as marital property. The most contentious point is what to do with unvested stock options.

The holder of unvested assets could make the argument that these are merely potential assets, that could in fact be lost or forfeited. In these cases, a thorough examination of the option and the holder’s relationship with the company must be completed.

There are many types of calculations necessary to complete when discussing both vested and unvested stock options in a divorce case, and the laws surrounding these things have been in flux for a good few years. The most important thing is to understand your local laws and keep an eye out for changes to them.

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