Jun 9, 2021 - Divorce by Seastrom Tuttle & Murphy
In California, where Silicon Valley firms often dish out equity to employees as a form of compensation, the net worth can skyrocket once a company gets sold or goes public. However, determining who is entitled to the value of those assets can be extremely complicated in a divorce. In particular, restrictive stock units (RSUs) present a challenge for couples who no longer wish to remain married. If you’re concerned about what could happen to your holdings in a divorce, you should speak with an Irvine divorce attorney at our firm who can help.
How are RSUs Different Than Stock Options?
Stock options are a contract that guarantees that the holder will be able to purchase a company’s stock at a particular price at a given date. That’s especially attractive for employees of growing companies, whose stock will likely climb significantly over time. An RSU, however, is a contract guaranteeing that the holder will receive a share of stock in the future, without ever having to pay for them. These types of stock units are usually designed to encourage employees to remain at a company until its successful, so that they may contribute to its success. Once these stocks vest, however, the owner will be required to pay ordinary income tax on them.
How are RSUs Treated in a Divorce?
California is a community property state, which means that all assets acquired by the couple while they were married will be considered marital property and therefore wholly divisible under the law. So, even if only one spouse in the relationship has earned RSUs as part of their compensation package at a technology firm, both will be entitled to reap the benefits of it in a divorce. RSUs that were granted and vested during the marriage will be quite easy to divide since those assets can be sold off and split between the parting spouses. Where it gets tricky, however, is when the RSUs have yet to vest, and the former spouse wants to lay claim to the profits. At that point, an experienced Irvine divorce attorney will have to step in and counsel you through the process.
There are a variety of ways your attorney might suggest dividing these assets. The first involves appraising the RSUs that have not yet vested by the date of separation and ordering that the spouse is given the equivalent value once they do vest. Another option would be to wait until the RSUs vest after the divorce and divide them then. Finally, the last option would be to use California’s Hug and Nelson formulas to divide the RSUs.
What are the Hug and Nelson Formulas?
The Hug and Nelson formulas help courts divide RSU assets in a divorce. These formulas will generally use the hire date, separation date, RSU grant date, vesting date, and the number of shares to determine how much is owed to the divorcing spouse at the time of the split. The Hug formula will be used when the RSUs are a reward for past performance, and the Nelson formula is designed to incentivize the employee to stay with the company.
Contact an Irvine Divorce Attorney to Learn More
Tech employees often have a lot to lose in a divorce. If you’re concerned that your RSUs will be significantly diminished in a divorce, you should contact an Irvine divorce attorney to explore your options.