Stock Options

By Schonauer Law on Dec 21, 2015 at 09:09 AM in What Does it Mean

Community Property (Stock Options)

An Employer may offer stock options to an employee to attract a new employee, as compensation for future service, and/or as an incentive for an employee to stay with the company.  A Stock option is an option to purchase a specific number of shares of employer’s stock at a particular price and time.

The particular price set for the purchase is the grant price and the particular time is the vesting schedule.  For instance, an employer may issue a stock option to an employee 2400 shares of stock at a grant price of $1.00.  The employee may be restricted regarding when the option may be exercised.  The employee may have to wait a period before the right (vest) to purchase, e.g. 100 options will vest each month over two-years.  After one month, the employee may purchase 100 shares for $1.00.  After two years, the employee may exercise 2400 options and purchase 2400 shares for a $1.00. 

The first vesting event often occurs within a year of the employer issuing the options.  This event is often referred to as the cliff, and may cause 20-25% of the options vesting.  If the options were issues as an incentive to and employee to remain with the employer, a vesting schedule will follow permitting the employee to exercise options over time.  If the employee ceases employment, the right to exercise vested options will usually cease in three to six months.

Whether stock options are the separate property or community property depends on when the options were issued and for what purpose.  Following dissolution, how the options are characterized for dividing the estate depends on if, and when, the options will vest.

Establishing a value for a stock option can be very tricky because it is an option/right to purchase that need never be exercise.  A value will depend on the particular company, size of grant, outstanding shares, whether the option is for Preferred stock or common stock, vesting schedule, option [grant] price…etc.

The court has several formulas it may employ to determine how to divide stock options.  You should consult with an attorney if stock options are part of your dissolution and with a tax attorney if you exercise any stock options.

I am licensed in California only. The above information is based upon California Law. The above information is not based upon your particular facts, and as such is not legal advice. For a more complete information, based upon your particular situation, I advise that you consult with an attorney.