Like many Family Law issues, there are differing viewpoints on how to value stock options. With such local emphasis on incentive stock options as part of compensation and the nature of the companies doing work in the Bay Area, valuing stock options incident to a marital dissolution is a common project.
Certainly, most practitioners are aware of the concepts of Nelson and Hug. In Nelson, the number of stock options allocated to the marital community is based upon the fraction of the number of days between the date of each particular stock grant to the date of separation divided by the number of days between the date of grant and the vesting date. The concept of Nelson is that stock options represent compensation for future work effort and that the granted stock options were not designed to attract an employee or reward past work effort. The incentive stock options are considered “golden handcuffs” designed to provide an incentive for the grantee/employee to remain employed by the grantor/company. In Nelson, the total length of employment is not considered. Rather, the duration between the date of grant and the dates of exercise and separation are the dispositive factors in the calculation
In Hug, the number of stock options allocated to the marital community is based upon the fraction of the number of days between the date of employment and the date of separation divided by the number of days between the date of employment and the various vesting dates associated with each option grant. The concept of Hug is that stock options represent compensation for past and future employment as well as to attract and retain employees. In Hug, the total length of employment is the dispositive factor in the calculation.
There is no “surprise” here, and in our experience, we believe both sets of calculations can and should be provided to both parties so that an informed negotiation can result.
Valuations play a part in transactions, taxation, and litigation. For additional information or advice on a current situation, please do not hesitate to call.