In this episode, Jake Gilbreath is joined by the firm’s Dallas-based partner, Ryan Segall, to explore the complexities that often come up regarding stock options in a pending divorce case in Texas. Jake and Ryan explore things to consider when dealing with various stock options, including valuation, division, and the firm’s experience negotiating stock options in a divorce. They conclude the episode by answering listener questions.
Divorce can be an emotionally challenging time, and when one or both spouses hold stock options, it adds a layer of complexity to the financial aspects of the separation. Schedule a consultation if you have a family law matter you want to speak to an attorney about.
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Your hosts have earned a reputation as fierce and effective advocates inside and outside of the courtroom. Both partners are experienced trial attorneys who have been board-certified in family law by the Texas Board of Legal Specialization.
Jake Gilbreath: All right, well thanks for tuning in to the “For Better, Worse, or Divorce” podcast. This is where we provide you tips and insight how to navigate divorce and child custody situations. I’m Jake Gilbreath and I’m here with one of our partners at Walters Gilbreath, Ryan Segall, who is Board Certified in family law and an outstanding lawyer out of our Dallas office. Today we’re going to talk about stock options, restricted stocks, and stuff like that which often come up in a divorce, and how we deal with those.
There’s a lot of, I think, questions that I get in consults about that or it comes up in mediation or of course at trial. So, we’re talking about that then maybe dovetail into other types of assets that come up in a divorce that we’re looking at that may not have an exact value on them that we can ascertain by going to a website and seeing what the balance is or something like that. But let’s start off by talking about options and restricted stocks. So Ryan, I guess can you kick us off and talk generally what types of, particularly from employers, what type of stock grants are you typically seeing in your divorces?
Ryan Segall: Yeah. So a lot of times you will have options that vest over a certain period of time. I’ve seen three, four, or five years. And it really depends. There’s two types of formulas that the courts use. They come from cases, I want to say they were in the ’70s or ’80s or so, one was “Barry v. Barry” and the other was “Taggart v. Taggart,” and essentially these formulas and which one you use depends on whether the options are fully vested or not as of the date of divorce.
Jake Gilbreath: Can you sort of talk to us what, for those of us that haven’t seen stock options or restricted stocks or don’t have an employer that does this, what do you mean by vesting?
Ryan Segall: Sure. So a lot of times what will happen is let’s say an employer awards 100 shares of stock in 2023. The employee may not necessarily get all 100 shares unless they complete three more years of employment. And so what we’re talking about by vesting, there’s usually laid out in documents from the employer, which are important to get in a divorce, laying out exactly what the vesting schedule is. So if it’s, let’s just say, a five-year vesting schedule for these 100 shares, you may get 20 shares. So if it’s five-year vesting schedule and you get 100 shares in that first year, you’ll get 20 shares each year that are vested. So, let’s say you stop working there at the end of year three, you may only get 60 of those 100 shares and typically these shares are awarded on an annual basis. So there’s always going to be some shares that are vested and some are not.
Jake Gilbreath: And we may be in the middle of a trial referred to kind of as a tranche. My understanding is, it kind of makes logical sense, the employer is doing this one because they want to bonus their employees or as additional compensation or what have you, but the reason you have the vest schedule, just think about one of our associates. If I say, “Here’s a bonus and I’m just going to give it to you, but please stick around for five years,” well hopefully they will, but what if they don’t? As the employer it’s like, “I’ve given you the money.”
So, my understanding as far as the vesting, it kind of motivates people to stay and of course have an investment in the company as well and want the company to do well, but also compensate and motivate them to stay. Then that way if you get let go or fired for performance issues or if you just walk in and quit, the employer doesn’t have to give you the unvested shares. Talk about the schedule and what you were just about to say, but also sort of talk about the schedule. So I think that kind of helps make sense of what you were saying as far as there being this vesting schedule.
Ryan Segall: Right. So one thing to keep in mind, and this isn’t just for stock options, this can be for pensions and things like that as well, in which in pensions that amount may increase that you get paid after you retire that amount may increase depending on how many years you’ve worked at a company. With vesting schedules, typically it’s laid out as far as the amounts of how they’re being awarded. There’s also, without getting into the nitty-gritty here, there’s also strike prices and things like that of when the employees can actually purchase these stock options.
It is important because every one of these companies are different in how these options vest. It’s important to look at the documents that depict, “hey, this is the vesting schedule. This is how many shares you’re going to get. This is when you can purchase those shares.” So I don’t know. Jake, have you had one recently that you’ve dealt with kind of an argument as far as valuations or anything like that on these?
Jake Gilbreath: The valuation’s interesting. So, let’s talk about that because I think it goes to how it’s divisions. It’s rare, maybe you’ll have a publicly traded company and then you can figure out what the valuation is. If it’s IBM or something like that, well we know what the value is of the company or the shares that you’re going to have. We know what the strike price is. We can figure out the valuation. And back to the schedule, I think what you were saying, Ryan, is whenever we divide these up or try to figure out before we divide, we have to figure out what’s community, what’s separate, when we’re figuring out what’s community and separate, a lot of times it’s just, “Okay, give me the vesting schedule.” It’s like, “Where are you at in the vest? Five-year vest. You’re two and a half years in.”
So we know that two years is vested. The half a year that you’re in, the third year of the vest, you may not get it. You get fired tomorrow, you’re not going to get it. You quit, you’re not going to get it. But you may continue on with this employer and you’re going to get it. But say we get you divorced right now, then some of that’s going to be your separate property. But it just comes down to where are you at in your vest schedule and it’s a relatively straightforward calculation. Then that dovetails into the, and I think you and I were talking before we got on the podcast, Ryan, it’s frankly not difficult. It’s just math. It is just, “give me your vesting schedule. Here’s the math.” If some component of it was vested before marriage, then that’s going to have a separate property component to it, but it’s just math.
I have seen people get CPAs involved to say what the community portion is and the separate portion is. There’s nothing wrong with having your math checked by a CPA, but it’s something that the lawyers, and if you’re in mediation, the mediator can all figure out what’s community and what’s separate by just look at the vesting schedules. But to kind of your point, Ryan, let’s say it’s a startup or let’s say it’s a company that’s not publicly traded and have stock options. Let’s say wife has 1000 stock options in company X that she works for. It’s not publicly traded, but what do we do for valuation?
Ryan Segall: Sometimes you can divide these stock options by actually awarding the options to the non-employee spouse. Talking about these formulas, it is pretty straightforward. It usually just depends on the months that you’ve been employed there versus the months during the marriage that you were employed there. And that’s how they kind of figure out, with a couple of other components as well, is figuring out the separate versus community. But when you’re dividing these things, there are risks both ways. So if a non-employee spouse says, “You know what? Let’s just value these things,” publicly traded company, like you said, Amazon, whatever, and they can just take the value and say, “You know what? You can keep your options. I want something to make up for the value that you’re getting,” you can do that.
When you get to these privately held companies that you just don’t know, the non-employee spouse can take some of the option, take some of the shares essentially and say whether they’re held in trust, whether they’re able to be transferred at all depends on the paperwork and what the company’s going to permit on that. The issue that you’re going to have in that case is exactly what you said. What happens if these things aren’t vested right now and the employee quits the next day after the divorce? And then the non-employee spouse is left with essentially nothing.
Jake Gilbreath: Yeah. I think there’s several ways that you can deal with it. I think one option is that you can take for options is let’s say for a privately owned company, because again, publicly, that’s pretty easy. It’s like, “We know what the value is. We can figure out what this is worth.” If it’s going on husband and her wife’s side of the spreadsheet, we know what that is, put a value on it, and then we have to compensate the other side by other assets, retirement asset, house, cash, what have you. That’s just like any other asset. But if it’s, “We don’t know what this is worth. We don’t know if this is going to be a really lucrative investment,” or not really investment I guess, award from the employer, but we don’t know if this is going to be really lucrative or it could be a swing and a miss.
It never has any value to it. So I see a lot of times where the employer spouse, and you are right by the way, Ryan, that as far as transferring them, it depends on the paperwork from the company. A lot of them don’t allow you to transfer them or don’t even allow for the court to divide them up where the non-employee spouse gets them and then we are having to set up the employee spouse as like what we call constructive trustee and there’s all sorts of contempt language where if they have to transfer or basically provide the financial benefit of them once vested and received or set up as a constructive trustee, but let’s go back to we don’t know it’s worth. So what do we do with that?
I see sometimes the spouses that are the employer and that they’ve sort of bought into emotionally this idea that, “I think this company’s going to be successful,” or, “I do really think that these are worth a lot of money.” I see some of them kind of get into a bidding war with their spouse, the non-employee spouse, and say, “Look, I really want these options and I think they’re worth X.” There’s no expert being able to say that they’re worth X. There’s no valuation that we can look at.
Ryan Segall: Well they’re never going to say that they actually want the option.
Jake Gilbreath: Yeah, yeah, yeah.
Ryan Segall: They’ll tell their attorney that, but they won’t say that to the other side.
Jake Gilbreath: Indicate to the other side, but they want it because they believe that it’s going to be worth a bunch of money. And if you’re the spouse that doesn’t own the options, you kind of have to think to yourself, “Well, do I want to accept the value that the other side kind of puts on it? Having really no information if that value is correct or not, do I want them myself?” That’s really rare. Or what’s more common is just, “Look, we’re going to split these up in kind.” Maybe through they’re not actually split, but with the employee spouse gets them, holds the other spouse’s half community portion, it’s constructive trustee, and just kind of take the ride together.
That’s probably the safest way to do it because I tell clients that are the non-employee spouse and that somebody works for a startup or works for a non-publicly traded company with options and what have you, you would hate to give up options and just say that the employee spouse can have them because you don’t think that they’re going anywhere. You give them up and then you read about the company on the cover page of Forbes Magazine a year later about how it just went public and it’s valued at billions of dollars, what have you.
So I see a lot of people just divide them up. I think the easiest and probably the safest way is to divide the community portion up, whatever the percentage division is, usually 50/50. Divide the community portion up and then we’re doing it if as in when received. So I guess talk to me about what that language, Ryan, because a lot of times, by the way, these are divided up by a single line on the spreadsheet. Community portion divide 50/50 if as in when received. So what’s that mean?
Ryan Segall: It’s exactly what it sounds like. It’s if the employee spouse receives them, then X, Y, Z happens, whether them transferring or whether them holding, it basically protects the employee’s spouse because if they never receive them, then they’re not under no obligation, but it also protects the other spouse because as soon as the employee’s spouse does receive them, then they are under an obligation. Going to your point, I have seen countless times in these mediations and settlement discussions where my client is absolutely hell bound on keeping, whether it’s stock options, whether it’s pension, and they just want 100% of it and because they have this belief that this company’s going to explode and things like that. I’ve even seen it with retirement accounts, just regular 401ks. For whatever reason, there’s some sentimental value of contributing to your own 401k, which I have to explain to them.
I get it, but on the other side of the coin, it’s pre-tax money that you’re arguing about here. You’re just going to get taxed on it at the end of the day. So yeah. On the valuation, like you said, I agree with you. The safest way is just to buy the options and go from there. Not only does it protect clients, but it also protects the attorneys as well because there’s certainly bad things that could happen if an attorney advises a client, “Hey, let’s just take money instead of the options,” and Forbes Magazine shows up and then the attorney’s getting a phone call from the client saying, “How could you advise me to do that?”
Jake Gilbreath: Yeah. I’m looking at the spreadsheet. It looks like we paid $5,000 for the other side to get awarded the options that we received 5,000, he got the options or she got the options, and there’s a lot of mentions of the word billions in this article I’m reading. What’s that about?
Ryan Segall: Maybe it’s a typo.
Jake Gilbreath: But it’s also on the flip side too, you have to tell the client that’s just hell-bent on, “I’ve got to have these,” it’s like, “okay, you got to make the other side an offer that makes sense,” because the court’s not going to sit there and put a value on them. They’re going to say, “divide them up if as when received.” But you got to warn the client that wants to buy out the other side and spend whatever money and said, “I’ll take the options and we’ll transfer whatever on the spreadsheet to you,” because they really believe it, I think it’s the attorney’s job to say, “If that’s what you want, and you can convince the other side, okay, but I can’t tell you that these are worth anything. I can’t tell you that it’s going to be worth what we’re paying him or her for it.”
For the unvested ones, I can’t tell you that you’re going to have a job tomorrow because what if you pay all this money for these options because you’re six months into a vest of a one-year fire schedule, but you’re three years, eight months in, and so you’re thinking you’re about to get this other tranche of options and you pay all this money for your spouse form because you think it’s going to be worth all this. And then you sign mediated selling agreements, binding irrevocable, you go in the office the next morning and there’s layoffs or you’re fired or you decide you get an offer that you can’t receive from another employer and then you just spent all this money on the spreadsheet to get these options that you’re not going to receive.” So you have to sort of think about it both ways and it comes back to really all just the safest way is to divide them up equally if as in receive, the community portion of course.
Ryan Segall: Yeah. I know this isn’t a pension discussion, but I think the two kind of go hand-in-hand because they are similar in that. I saw this discussed on social media the other day of someone was trying to value teacher retirement system, TRS pension. And on the TRS statements, they have a little number there that’s basically your payout. And some attorneys will look at that and say, “Well that’s the value of this pension,” which is absolutely not the case. And valuing those sort of pensions is impossible almost because you’re having to predict how long someone’s going to live and things of that nature. And the easy way to do it is, just like the stock options, is just divide it. You get 50% of whatever the pension pays out over time and it can be problematic.
Jake Gilbreath: We don’t see pensions as much as we used to, you and I being older, but you still see them as particularly teachers, but police officers, firefighters and that’s absolutely right.
Ryan Segall: I had a railroad one once.
Jake Gilbreath: Okay, there we go. It’s just I get you can get an expert, you can get look at the actuary tables, but sometimes those assets that there’s not, like you said, it’s just not a clear value on them, that’s the safer, easier way of doing it. But giving the client all the options and talking through that and to the point, it is shocking how many times over my years of practice I’ve seen somebody just accept whatever the website says as far as value for pension and just like you said, that means not the value of that pension. That can be a huge mistake that a practitioner can make if they’re not familiar with these types of assets. Well, those are some of the issues that come up with these types of assets. I think that gives everybody kind of a broad overview, but of course every single case is different. Every single employer is different.
We see they’re similar but different. And so it is important to consult with a lawyer. I see people unfortunately mess this up or practitioner who doesn’t know what he or she is doing may make the type of mistakes that we’ve talked about. So make sure to consult with a lawyer who has experience in family law, a board-certified lawyer in family law because these can get pretty complex pretty quickly if you don’t have the experience. But we’ll wrap up about that topic for today. Stock options, restricted stock. Very fascinating topic, at least for Ryan and myself. A little dry, but I think it’s important for people to know about it.
So if you have liked what you heard today, do us a favor, and leave a review. We always appreciate feedback, especially if it helps us better the podcast. Any follow-up questions about this episode, it’s kind of a more dry, complex topic, but feel free to email us or call the office. You can email us at podcast@waltersgilbreath.com. You can visit our website at waltersgilbreath.com. And I’m Jake Gilbreath. I’m here with Ryan and thank y’all for listening.
For information about the topics covered in today’s episode and more, you can visit our website at waltersgilbreath.com. Thanks for tuning in to today’s episode of For Better, Worse, or Divorce where we post new episodes every first and third Wednesday. Do you have a topic you want us to discuss or a question for our hosts? Email us at podcast@waltersgilbreath.com. Thanks for listening. Until next time.
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