Valuing and Apportioning Employee Stock Options
Employee Stock Options may be worth a substantial amount of money and they may be marital property. The two issues for a divorcing couple are (i) the apportionment of the options between marital and separate property and (ii) their value.
In many states, if the options were granted during the marriage and "vest" during the marriage, they may be considered marital property. But if they were granted before the date of marriage or vest after the date of separation they may need to be apportioned between marital and separate property in accordance with state law. In some states the separate options may be considered in support calculations. Complex issues may arise, such as if options are granted to replace a previous option grant or other form of compensation.
A problem with "marital" stock options occurs if their transfer from the employee spouse to the non-employee spouse is restricted. One alternative is to value the options and exchange them for an equal value of some other marital asset.
Two general types of "value" may be recognized in stock options: (i) their "intrinsic" value, which is the difference at any point in time between their market price and the price at which they were granted, and (ii) their "time" value, which reflects the probability they will increase in value before they expire.
The value of an option with time to run is seldom equal to its intrinsic value. For example, let us assume a vested option with 5 years to run until expiration - say it has a market value of $10 and a strike price of $10, therefore an intrinsic value of $0. If the value were really $0, the employee should be willing to give the option away, but $0 value takes no account of the possibility, however small, that the market price will exceed $10 in the next 5 years at no cost or downward risk to the employee.
Stock options are valued every day in the financial markets, one of the best known methods being the Black-Scholes model. Unlike freely traded options, the value of employee stock options may need to be adjusted due to restrictions on their marketability and other factors. Therefore the prices found in the financial pages for freely traded options may differ from the value of employee stock options.
Due to their complexity, it is advisable for an expert to value and apportion employee stock options for divorce purposes. Our firm charges an hourly fee for this work. We do not provide tax advice; a tax advisor should be consulted before finalizing any action.