Division of Employee Stock Options

Some companies offer their employees stock options as part of the compensation package. A typical employee stock option has the following components:

• Exercise Price - the cost at which the employee may purchase the stock. If the exercise price is below the share price, then the option has value. However, if the company stock has fallen and the exercise price is higher than buying the shares publicly, the option is effectively worthless.
• Quantity - how many shares the employee may purchase.
• Option Period - this will typically include a vesting date, and a duration for which the option may be exercised - typically 10 years.

Example - if at the vesting date the employee has an option to purchase 1000 shares of the company at $30 each, and the shares are being publicly traded at $40 each, the value of the option on that date is $10 per share, or $10,000 total.

As a Colorado court once put it, an employee stock option is simply “a contractual right to purchase stock during a specified period at a predetermined price.” In re: Marriage of Miller, 915 P.2d 1314 (Colo. 1996).

A complete explanation of stock options, and of the various complex methods of valuation, is beyond the scope of this article. But for more information, Wikipedia has a good article on Employee Stock Options.

When Can Stock Options Be Divided?

Though most employee stock options are non-transferable, they are still a marital asset which can be divided by the court. But the question which has resulted in much litigation is when they are subject to division - when earned, when vested, when exercised, etc.

In Colorado, an “employee stock option constitutes property for the purposes of dissolution proceedings only when the employee has an enforceable right to the options.” In re: Marriage of Balanson, 25 P.3d 28 (Colo. 2001).

What does this mean?  Not whether the options are presently exercisable (usually they won't be, since the option typically vests in the future), but whether they are presently enforceable. This means looking at what conditions the employee must satisfy to earn the vesting - if it's a signing bonus, then it's enforceable when joining the company. But if it's based upon future performance, then the option may not yet be enforceable, or only be partially-enforceable. By way of example, if at the time of dissolution the employee is one year into a 5 year employment period required for the options to vest, then 20% of the options would be marital.

Stock Options Awarded for Prior Work

Stock options which are awarded after-the-fact based upon a prior job well done are not enforceable until actually awarded. In re: Marriage of Powell, 220 P.3d 952 (Colo. App. 2009). While an employee may have an expectancy that options will later be awarded, until they are actually formally awarded, they are not divisible property.

Like most bright-line rules, the results may not make perfect sense. An option awarded during the marriage based upon work performed prior to the marriage is divisible marital property.

And the reverse is also true. When the work done during marriage is rewarded with stock options awarded after dissolution, those options are not a divisible marital asset.

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The family law attorneys at Graham.Law have years of experience helping clients through the Colorado legal system. We know Colorado family laws, inside and out, from divorce to legal separation, from annulments to military divorce issues. And we know how to divide marital property, including employee benefits and stock options. For more information about our El Paso County family law firm, click on:

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