Pozzuolo Rodden, P.C., Philadelphia Family Law Attorneys, Release the Article: "The Valuation of Unvested Stock Options in Divorce"

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This article discusses the numerous financial issues that need to be resolved when valuing unvested stock options when going through a divorce.

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Pozzuolo Rodden P.C., Philadelphia Family Law Lawyers, announces the release of "Financial Issues In Divorce: The Valuation of Unvested Stock Options in an Equitable Distribution Dissolution."

Divorce between parties can often be complicated with numerous complex financial issues that need to be resolved. One such complex financial issue that may arise is the valuation and equitable distribution of unvested stock options.

As a benefit of employment, employees are sometimes offered stock options that can be exercised at a later date. Stock options are typically a form of compensation from an employer and allow an employee the option to buy a specific stock at a set price during a set period of time, regardless of shifts in the stock’s market value at that time. Stock options are unvested when they cannot be exercised due to conditions attached to the stock options. The stock options will become vested when the attached conditions are met allowing the stock options to be exercised. When couples are divorcing, any unvested stock options that were acquired during the parties’ marriage, prior to separation, are considered to be marital property. As marital property, a spouse’s unvested stock options are subject to equitable distribution during a divorce.

In Fisher v. Fisher, 564 Pa. 586, 769 A.2d 1165, the Supreme Court of Pennsylvania first considered whether unvested stock options were marital property and how to address the equitable distribution of unvested stock options. The Court first held that unvested stock options are a type of deferred compensation which has been earned by the employee and that they qualify as marital property subject to equitable distribution, even if these unvested stock could not have been exercised at any point during the marriage. The Court then addressed how best to value the unvested stock options for the purposes of equitable distribution.

It is widely recognized that ascribing a set value to unvested stock options is a difficult, speculative, and imprecise task. The Court in Fisher, found such valuations could not be done reliably because it is impossible to reliably predict the value of any stock at a future date. The Court held that deferred distribution was the best option available to parties because even though options for valuing unvested stock options existed, the results were too speculative to enforce. The Court found that with deferred distribution the unvested stock options would be excluded from immediate distribution between the divorcing spouses and the case would be held open as long as necessary to ascertain the value of the stock options when they become fully vested allowing the stock option to be exercised. Once the stock is vested, the Court reasoned it would be in a better position to distribute the stock options in an equitable manner between the parties. The Court recognized this could lead to situations where one spouse acts spitefully and refuses to exercise the stock options once they become vested to limit distributions to the other spouse. However, the Court felt that the trial court could adequately address any situations involving spiteful spouses as they arose.

While deferred distribution permits divorcing couples to have the most accurate value assigned to unvested stock options, many couples do not wish for their case to remain open while waiting for the stock options to vest. Accordingly, many divorcing couples will elect to enter into a property settlement agreement governing how the unvested stock options will between them instead of through deferred distribution supervised by the Court.

If it is possible for the unvested stock options to be transferred or divided then parties may wish to distribute the actual stock options between them instead of attempting to set a value for the unvested stock options. Unfortunately, this is not often a feasible solution because many unvested stock options are granted to employees as a condition of continued employment and as such they are nontransferable and indivisible.

Property settlement agreements dealing with the distribution of unvested stock options allow for the parties to expediently resolve their divorce litigation and determine a mutually agreeable way to value the unvested stock options. However, no matter what valuation method is applied, the results are still speculative to some degree. This is because there can be no guarantee that the stock options will ever be exercised. Unforeseen circumstances, such as, the employee no longer working for the company or company could be the subject of a hostile takeover, can diminish an employee’s ability to exercise the stock options once they become vested.

If parties wish to enter into a property settlement agreement, there are multiple valuation methods available to determine the value of unvested stock options. Some of the most common methods are, as follows:

1.     Intrinsic Value

This method determines a stock option’s value by looking at the differences between the strike price (the amount required to exercise the stock option) and the current market value of the stock. This method is considered highly speculative and is not necessarily a good indication of the unvested stocks option’s potential value once it is fully vested and exercised.

2.     Discount to Present Value

The Discount to Present Value Method begins similarly to the Intrinsic Value Method, by determining the difference between the strike price of the unvested stock options and the current market price for the stock. However, further discounts are applied to the difference to determine the present value which include, but are not limited to, taxes due upon exercising the stock options, lack of marketability and the risk of forfeiture.

3.    Black-Scholes Formula

The Black-Scholes formula is a complex mathematical formula, which can be used to predict the value of stock options. This formula is used to develop the estimated price of different stock options over a period of time. This formula is typically used by financial analysts when attempting to value stock options. The formula takes multiple factors into account, including, but not limited to, stock prices historically (whether variable or constant), the volatility of the stock’s return, amount of time until the stock options become vested, interest rates, the strike price of the stock options, and the probability of the holder exercising the stock option.

If you are going through a divorce and have questions or concerns regarding unvested stock options and their valuation, or other complex financial issues in divorce, please do not hesitate to contact our offices and schedule a consultation with our experienced attorneys.

Contact our Philadelphia Family Law Firm with your questions, comments or concerns.

If you would like to read other family law, business law, or estate planning topics, please visit: http://www.pozzuolo.com.

Pozzuolo Rodden, P.C. provides specialized cost-effective legal services to privately held business owners and high-net-worth clients in Pennsylvania and New Jersey in excess of 35 years.

Practice Areas: Business/Corporate Litigation | Business/Corporate Law | Family Law; Family Litigation| Real Estate | Employment Law | Estate Planning | Tax & Pension Law

Pozzuolo Rodden, P.C.
Counselors at Law
2033 Walnut Street
Philadelphia, PA 19103

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Joseph R. Pozzuolo, J.D., B.B.A.
Pozzulo Rodden, PC
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