Stock Options in Utah Divorces: The Difficulties and How Things Normally Work Out
When people divorce, they divide their stuff.
Stuff can be anything from personal property (e.g. clothes, jewelry, furniture) to homes to retirement accounts. If you have stuff, it’s going to be divided during divorce.
Utah is what we call an equitable division of the assets state. Equitable means fair, and fair usually means a 50/50 split. Of course, usually means there are lots of cases that aren’t usual, so 50/50 is not guaranteed, but it’s a good place to start figuring out how your assets will be split.
Easy vs. Hard
Some assets are easily divided.
For example, a bank account with $10,000 in it is easily divided in divorce. Each person receives $5000. Voilà, divided evenly.
Some assets are hard to divide.
One reason some assets are hard to divide is you can’t actually divide them.
Cars are a great example of this problem. You can’t cut a car in half. Someone will receive the entire car. This means you’ll need to value the entire car, then give the person who didn’t get the car half the value of the car somewhere else.
Another reason some assets are hard to divide is because it’s very difficult to figure out how much they’re worth.
Artwork is a good example if this. Art has very little utility value (as opposed to a car), so it’s difficult to put a price tag on it. What we end up doing is finding an art appraiser who comes in and determines the value of artwork. Honestly, in my experience, these appraisals seem to be half made up. Anyway, the point is it’s very difficult to get a good handle on how much some things, like artwork, are really worth.
Stock Options Are Hard to Value
If I were to place stock options in either the easy-to-value or hard-to-value category, they would almost always go in the hard category.
Most people receive stock options, not in publicly traded companies on the S&P 500 where valuations are mostly public and transparent, but in small companies that are not publicly traded.
These small companies, many of which are start-ups, are incredibly volatile. This makes valuing stock difficult because they may be worth a lot during a good quarter, and then a lot less during a down quarter.
Many stock options at small companies are restricted in the sense they cannot be sold except with the permission of company leaders. This makes valuing difficult because you don’t know when a stock can actually be sold. So, a stock may have worth, but you can’t liquidate it for five years, so it really has no present value in money you can get at.
Stock options are also difficult to value because they usually have a vesting period. This means you have an interest in stock options, but that interest doesn’t hit 100% until some years down the road working at that company. And if you leave your job, or a volatile company goes bankrupt before vesting, you might not get anything at all.
All of these things make stock options one of the most difficult things to value in a divorce. And because they’re so difficult to value, they’re also very difficult to divide.
(Note: one of the reasons stock options are difficult to divide is smaller companies will not usually allow holders of stock options to give them to someone else.)
How Do You Value Stock Options?
There are two major methods for valuing stock options.
First, you bring in an economist to determine present and future value.
This is the best way to value stock options because you have an expert saying what the stock options are worth now, and what they will be worth when they vest. It’s hard to argue with an expert economist in mediation, and a judge will rely on the expert at trial.
The issue with this method is you have to pay the economist probably in the neighborhood of $5000 to $10,000, if not more depending on the complexity of the valuation.
Second, you make up a number.
I’m not joking, you make up a number. You make an educated guess regarding the present value of the options, and then give half of that number to the other spouse.
This is not a particularly accurate way to do things, but it’s by far the most common method.
Why is it the most common method?
Because most people who have stock options have maybe thousands or tens-of-thousands of dollars in options, and they don’t want to spend $10,000 on an expert to value them.
You spend money on an expert when you have hundreds-of-thousands or millions in stock options.
How Do You Usually Divide Stock Options in Utah Divorces?
What I want to do here is give you an idea of the most common ways people actually divide stock options in Utah divorces. Not a theory or how to, but how people really do it most of the time.
Common way #1: Sell all vested stocks and divide the money.
If the stock options have vested, most people sell the stocks and then divide the money with their ex. This is the easiest and cleanest way to do things, and it’s what we recommend most of the time.
Common way #2: Agree on a present value of the options and divide that amount in half.
Like I said before, most people don’t hire an economist to value stock options, and most stock options haven’t vested at the time of divorce. They way people deal with these two problems is to negotiate and come up with a value, then divide that number in half.
For example, if you’re the spouse with options you agree are worth $50,000, you will need to give your spouse $25,000 somehow. Usually that’s done by taking less in home equity or giving $25,000 more from a 401(k).
Common way #3: Agree to divide stock at the time of sale.
If you can’t sell stock, and you can’t agree on a present value to divide, people will agree to wait and divide stock when they can be sold.
For example, a couple will wait for all options to vest, which will take three years. At the end of those three years, the stock will be sold, and the money divided.
The major issue with this way is everyone’s taking a risk. The spouse who has the stock options is taking the risk that the stock will go up in value, and the ex will get more than he or should would have received at the time of divorce. The ex is taking the risk that the stock will go down in value and he or she will receive less than at the time of divorce.
Conclusion: Get Some Help
If you have stock options, your divorce is necessarily complicated. Don’t try to wing it and do your divorce on your own. You’ll want someone by your side who will work through the option with you and let you know which way you should go.
