If you are considering divorce or dissolution, you know that one of the hurdles you will face is dividing your marital property. Dividing property is always a challenge, even when its value is known or easy to determine, like a bank account or a house. Some assets are more difficult to value and may even be “invisible,” in the sense that they are easy to overlook when you are considering the scope of your marital property. One such easily-overlooked asset is stock options. If your spouse has been awarded stock options by an employer during the marriage, you may be only vaguely aware of them. Failing to pay proper attention to these assets could cost you dearly.
If you are a spouse who has been awarded stock options during your marriage, you may question whether your spouse has any right to them. Once again, failing to know the answer to this question could hurt you.
What Are Stock Options?
Most people have heard of stock options, but many don’t have a firm grasp on what they are or how they might be divided in a divorce. In a nutshell, stock options are pretty much what they sound like: the option to purchase stock in a company. The reason stock options can be so valuable is that they offer the chance to buy stock in the future at a price determined in the present. In the best-case scenario, the stock price rises sharply, so the holder of a stock option gets to pay a low price for something that is actually worth much more.
A common scenario involves a newer company looking to hire or retain talent. Lacking the cash to offer a high salary, the company instead offers a lower salary, but sweetens the deal with stock options. It’s a win-win: the company gets a strong employee who is motivated to work hard, which in turn will help the value of the company, and the stock options awarded will also increase in value.
It might look something like this: Jane gets hired at a start-up company. In addition to her modest salary, she is awarded stock options that would allow her to purchase company stock at the price of $10 per share. In seven years, when Jane decides to exercise her stock options, she is able to buy 1000 shares of company stock, valued at $100 per share, for that $10 per share price. In other words, she invests $10,000, and immediately has a stock portfolio worth $100,000.
Jane may also be awarded shares of restricted stock, which are somewhat different from stock options. Restricted stock is stock in a company that is granted to an employee at no cost; however, it does not transfer to, or “vest in,” the employee until certain conditions are met—typically, that the employee has been employed by the company for a certain number of years. Between restricted stock and stock options, an employee may be holding on to a lot of future value. But how does that value get divided in a divorce?
Dividing Stock Options in an Ohio Divorce
In some states, unvested stock options or restricted stock are not considered marital property. However, in Ohio, restricted stock and stock options earned during the marriage are considered marital property subject to division in divorce and dissolution, even if they have not yet vested.
If you are divorcing, an important step in property division is finding out whether your spouse has stock options or restricted stock. Don’t assume that you would know if they did; unexercised stock options and unvested restricted stock typically don’t show up on tax forms or financial documentation. It’s even possible that your spouse will have forgotten about them, since they don’t play a part in his or her daily finances. Equally possible is a scenario in which a sneaky spouse fails to mention these assets in property division, then quietly takes advantage of them after the divorce is final. Either way, it is important to find out for yourself whether your spouse has stock options or restricted stock.
Your divorce attorney should always assume that stock options or restricted stock could be a part of marital property. Investigating that issue may start with interrogatories (written questions) during the discovery phase of your divorce case. Your attorney may also subpoena your spouse’s company for the information.
Negotiating About Stock Options in Divorce
Once your attorney discovers that there are stock options or restricted stock, the next step is to determine when they can be exercised, or when they must be exercised, or whether they will expire if not exercised by a certain date. Of course, it’s important to determine the current value of the options, as well. While it’s possible the value of the stock is higher than the cost stated in the options, it is also possible that the cost is lower. Don’t assume this is a worthless asset; the stock could rise in value over time.
Some attorneys like to offer the spouse who holds the allegedly worthless options a nominal amount in exchange for them. If the options were really worthless, this would be a good deal. In practice, though, the spouse with the options almost always refuses to sell them; they are hoping, even expecting, that the options will increase in value.
It’s relatively easy to determine the value of publicly-traded stock. It’s quite a bit more challenging with a small, closely-held company. If your spouse’s stock options are in a company that is not publicly traded, your attorney may recommend bringing in a forensic accountant to try to determine the current (and probable future) value of the asset.
Once you know the value of the stock, you and your spouse will need to decide whether you are going to divide it, or if your spouse will keep the stock options while you accept an equivalent amount of other assets. You may feel more comfortable with assets whose value is less likely to fluctuate.
Sometimes it makes sense to put a contingency clause in a Separation Agreement – if the option earned during the marriage is exercised later, the other spouse will share in the gains. If your settlement agreement or decree does grant you some of the stock options, remember that they are only paper assets until they are actually exercised. Many financial professionals encourage their clients to exercise (buy the stock at a reduced rate) stock options as soon as possible, to avoid a potential loss of value.
Last but not least, consult with your attorney and/or a tax professional about the tax implications of receiving stock options in a divorce settlement. The value of any asset received in divorce must always be balanced against any tax burden it might carry.
If you have questions about stock options received in a divorce that we haven’t answered here, we invite you to contact Melissa Graham-Hurd and Associates to schedule a consultation.