Solving Complex Family Law Issues with Creative Strategies

How to Split Founder’s Stock, Stock Options, and RSUs in a Bay Area Divorce

Client and attorney drafting up a way to split stocks during a divorce.

If you’re getting divorced in the San Francisco Bay Area, chances are high that you and your spouse are looking to divide or split stocks or stock options – some of which may not have vested. How can you expect to split these types of assets?

Stock options give you the right to buy a company’s stock at a later date at certain price. Stock compensation packages are popular for growing companies that expect to build their value in the future. This makes them a particularly appealing match for startups.

As a result, stock options are a common form of compensation in startup-rich Silicon Valley. Your stock holdings may be among your highest valued assets or they could prove lucrative years down the road. That means you’ll have to address them now in your divorce.

During the divorce process, you and your spouse will go through a disclosure period where you must both provide documentation on your income, bills, debts, and assets including stocks. You or your spouse may own founder’s stock, stock options, and/or restricted stock units (RSUs), among others. The best way to split these assets in your divorce will vary depending on the types of shares that you hold.

The most challenging part of splitting stock options involves valuing holdings that haven’t yet vested. An experienced divorce lawyer can help you evaluate the assets that you and your spouse hold and create the best strategy for your divorce moving forward.

Are Stock Options Marital Property?

California is a community property law state. Typically in California divorce, you get to keep 100% of your own separate property, which includes:

  • Anything you owned or earned before your marriage, and
  • Any individual gifts or inheritances you get during your marriage.

In contrast, anything you earn during your marriage qualifies as community property that you must split equally between you and your spouse. The cut-off date for community property is the date you and your spouse separate. Your date of separation marks the day that at least one spouse decided the marriage was over and took action by informing the other spouse.

However, vesting interests work differently. When splitting unvested stocks, stock options, or RSUs in a divorce, California law follows a time rule. So, if you were granted stock options or RSUs prior to marriage, but they vest during marriage OR if you were granted stock options or RSUs during marriage that vest after separation, the court will apportion these stocks between community and separate property based on how long you were married and working during the vesting period.

Any stock options acquired after your date of separation generally remain separate property.

Split Stocks in California Divorce

Even if you don’t end up going to court for your divorce, you must always strategize with potential litigation in mind. The law determines where you stand in your divorce negotiations.

California courts treat stocks in publicly-held corporations as returns on capital. As a result, their ownership interest follows the doctrine rule to the source of the original investment. If the original investment is separate property you acquired before your marriage, any stock dividends or increases remain separate property even if you’re actively involved in the corporation.

Tracing the source of the property could mean looking into the funds originally used to purchase the stock options. If the funds came from a joint marital account, a court is likely to consider those stocks as community property subject to a 50/50 split.

The community has an apportionable property interest in deferred compensation for services rendered during the marriage. This is true for employee stock options acquired during the marriage, whether they vest during the marriage or after the date of separation.

When determining the apportionment of assets, courts consider any benefits attributable to either spouse’s employment during the marriage as community property. That means even if you owned stock in a business before the marriage, your spouse has an interest in the increased stock value in proportion to your efforts to build the business during the marriage.

Apportioning the value of stocks can get complicated with various legal formulas to estimate the ratio of capital versus business efforts. An expert Silicon Valley divorce attorney can help you work out how to split the value of your stock options in the case of a divorce.

Splitting Founder’s Stock in California Divorce

You may also hold stock in a company that you founded. California courts treat founder’s stock with similar acquisition time rules as other stock options.

If you’re married when you establish your business and all of your stock is vested, the company will count as community property even if your spouse plays no role in building the business. In a divorce, your spouse will have a 50% claim in the value of the company or any stock options you hold (assuming that the business was started during marriage and all of the stock was vested). If you were married when you started the business and the stock vests after separation, then it will be divided according to the time rule described above and below. Generally, a non-working spouse cannot get voting rights or control over your company.

California divorce rules don’t require spouses to split their community property equally “in-kind.” So one spouse might get the house while the other gets assets of equal value.

Privately held stocks are often split down the middle in a divorce because they’re much more difficult to appraise. But you might not want your ex-spouse to have stock in your company. Similar to other stock options, you can buy out your spouse’s interest in your business. You could even negotiate the value of another asset in equal exchange for your spouse’s holdings.

Splitting Restricted Stock Units (RSUs) in California Divorce

Restricted stock units (RSUs) guarantee that you’ll receive a share of a company’s stock when certain conditions are met. Employers use RSUs as “golden handcuffs” to incentivize valuable employees to stay at the company at least until their stock options vest.

RSUs are “restricted” because they depend on a vesting schedule, usually triggered by the amount of time you’ve spent at the company or by meeting certain performance goals.

RSUs may include additional restrictions on sales or transfers, most commonly in private companies. If your spouse gets a share of your stocks that has a transfer restriction, they may have to exercise or sell those stocks on your behalf.

When calculating marital division for RSUs, California community property rules use one of two formulas: the Hug Formula and the Nelson Formula.

  • The Hug Formula treats RSUs as deferred compensation for past performance.
  • The Nelson Formula treats RSUs as incentive for future performance.

When approaching how to split RSUs in your divorce, you’ll have to decide whether you want to divide the shares or pursue a buyout. Your divorce attorney can help you craft the best approach as well as deal with legal nuances and tax details.

As a general rule under California’s community property laws:

  • RSUs granted and vested during your marriage qualify as community property to be divided equally between spouses.
  • RSUs granted after your separation or divorce are separate property.
  • RSUs granted during your marriage but vested after separation have both community property and separate property portions.
  • RSUs granted before your marriage and vested during your marriage also have both community and separate property portions.

You can also value RSUs for offset – where you get to keep all or part of your stock options in exchange for other assets or cash to be given to your spouse.

Division of stock options and restricted stocks can present some of the most nuanced and challenging aspects of a complex, high-net-worth divorce. When looking for a lawyer to represent you in your San Francisco divorce, make sure to find an attorney who’s familiar with the intricacies of the stock options most commonly seen in the Bay Area.