Employee Stock Options

Valuation, Apportionment, Tax and Other Strategic Issues

Employee or Executive Stock Options are becoming increasingly more popular forms of compensation in the work place. Understanding how to value and transfer Stock Options are particularly important when dividing marital property.
Under California Law, assets acquired during the marriage are community property. Consequently, stock options, to the extent that they are “earned” during the marriage, are community property.

Typically the courts will determine the value of the Stock Options based on a “time rule” formula pursuant to In re Marriage of Judd (1977) 68 Cal.App.3d 515, 137 Cal.Rptr. 318.

The formula is as follows: 

(Date of Grant to Date of Separation) / (Date of Grant to Date of Vesting) X (# of Shares Exercisable) = Community Property Shares

The time rule formula for dividing Stock Options was modified slightly in In re Marriage of Hug (1984) 154 Cal.App.3d 780, 201 Cal. Rptr. 676. Pursuant to Hug, supra, the date of employment may be used to value the Stock Options instead of the date of grant if the employee was granted those options as an incentive to his employment.

As part of the valuation of the Stock Options, there are certain tax consequences that should be considered. Some Stock Options are taxed when they are exercised.. The taxable income is the difference between the market value at the time the stock is exercised and the exercise price.

All Stock Options may be taxed upon the sale of the stock, when a capitol gain or loss is recognized.

Finally, since most Stock Options are non-transferable, transferring the options may present a certain risk for the non-employee spouse. Under most circumstances, the non-employee spouse must depend upon the employee spouse to exercise those options and give proper notice of the same.

There is additional vulnerability to the non-employee spouse if the options are contingent on the employee spouse’s continued employment with the company.

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