By: Jessica A. Saldin
When proceeding through a divorce case in Colorado, there are sometimes unique property items that raise special questions when it comes to the treatment of those items for division purposes. For example, trusts, business interests, PERA accounts, etc. all have unique aspects which have been discussed in previous blog posts. Another property item that has unique qualities is stock grants or stock options in a divorce. Depending on the status of those items, they may not even be considered a property item that is up for discussion. If the stock options are vested, they are considered property and would then be divided as any other property item (i.e., is it marital or separate, if marital how is it going to be divided to reach an equitable distribution- see prior blog posts on the determinations of marital v. separate property and how marital property is divided).
If the stock options are not vested, though, additional inquiries need to be made in order to determine whether the stocks are marital property or not. Unfortunately, the inquiry is not as straightforward as whether the stock options are vested. Unvested stock options can still be considered marital property subject to division. The main inquiry relates to the purpose for which the stock options were granted. If the stocks were granted for past performance, i.e., as a reward for a good job done, in lieu of a bonus, etc. and have no restrictions on exercising other than awaiting the vesting period, those stocks are still considered property and are subject to division in a divorce case. That is not the end of the inquiry, though, as obviously those stocks must be given a value before they can be divided. The party retaining the stock options will argue the value should be zero since the options are not vested and cannot be presently exercised. The party not retaining the options, and seeking an equalization payment or property off-set for the stocks, will likely argue they should be valued based on the stock price for the options at the date of divorce, regardless of whether they can be exercised or not.
Neither argument is necessarily the correct valuation. Putting zero in the valuation falsely lowers the recipient’s overall marital property because the stocks do have some value and, once vested and exercised, will be marital property to the recipient. Likewise, putting the current stock price as the marital value falsely increases the recipient’s overall property value because it does not account for risk of a drop in the stock price (i.e., depending on the vesting date, the recipient could have to wait years before the options vest and can be exercised and there is no guarantee the stock price will be as high at that time as it is at the time of the divorce). Therefore, the valuation is usually somewhere in the middle and, if the parties cannot agree on a value, they may need to utilize the services of an expert. Such expert is typically going to be a CPA who will consider the market, risk factors, length of time before the options vest, etc. and will put a value on the options for the purposes of property division. As valuation experts can be costly, my two cents would be to first assess how much money or value is really being argued over before shelling out too much. Thus, a cost/benefit analysis is certainly warranted.
The other possibility is if the stock options are granted for a guarantee of future performance. For example, if an employer wants to give an employee an incentive to remain with that employer, they can give them a grant of stock options that will not vest unless the employee is still employed on the future vesting date. In this case, the options should not yet be considered property because the requirements that need to be met before the options can vest will not be met until after the divorce. For example, if the options will not vest for another two years after the divorce, the employee spouse would need to maintain that employment for that two year period before the stocks could vest. Thus, if the requirements that must be met before the stock can vest (other than just waiting out the time for vesting) have not occurred prior to the dissolution, the stock grants should not be considered property subject to division as part of the divorce.