San Francisco Family Law Firm Explains the Link between IPOs and Divorce

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Heath-Newton, a San Francisco family law firm, offers a guide to understanding and strategizing divorce in Silicon Valley: IPOs, Stock Options/RSUs, and community property.

Divorce Attorney, Family Law, Child Custody Attorney San Francisco

Heath-Newton, LLP is a San Francisco family law practice that focuses on families

IPOs are often a significant event for the employees of these companies who are in the process of obtaining a divorce in California or considering whether to do so

Yelp, the consumer review super-site, recently had an extremely successful initial public offering (IPO), following hot on the heels of successful IPOs from other tech companies like LinkedIn, Groupon and Zynga. Facebook’s upcoming IPO, expected in May, is anticipated by many to be one of the strongest debuts in the history of the US stock market.

Robert Kamin, a partner at San Francisco family law firm Heath-Newton, says one issue with IPOs that is largely ignored is how they affect the personal lives of company employees. He points out that California’s laws regarding community property, marriage and divorce can have a huge effect on the life decisions of people who work for these companies, most of which are based in Silicon Valley.

“When reading about the Zynga, Yelp, and Facebook IPOs on the latest blogs and online newspapers, the connection between these enormous financial events and marital and domestic-partnership dissolutions, aka divorce, is simply not discussed,” notes Kamin. “Based on the discourse alone, one would assume that these IPOs have no effect at all on dissolutions in California or any other state. To the contrary, IPOs are often a significant event for the employees of these companies who are in the process of obtaining a divorce in California or considering whether to do so.”

The headquarters of Zynga, Yelp, and Facebook are located Silicon Valley. These three companies and others like them attract the most competitive employees from all over the country and world and promise them future interests in the company as part of their compensation, says Kamin. Sometimes these future interests come in the form of restrictive stock units (RSUs); other times they are offered as stock options or other variances of future interests. Most commonly, the future interests vest or are exercise-able when two events occur: (1) the IPO (or change of control) and (2) the employee remains employed with the company over a particular period of time, aka “time” requirement.

Kamin offers a hypothetical example, which is reflective of common circumstances for a married employee at one of these companies, of the way these future interest payments and their schedules relate to divorce:

A married applicant obtains employment with Yelp with the promise of RSUs that are to vest over a period of ten years. That promise by the company is acquired during marriage. The community therefore retains an interest. How much of an interest will depend on when events (1) and (2) occur, as well as the date of separation.

“The date of separation is arguably the most significant date in California community property law,” claims Kamin. “The fundamental presumptions of California community property law are unambiguous and unforgiving.”

Under California law, an asset is presumed to be community property if it is acquired after the date of marriage yet before date of separation. A community interest is shared equally between spouses/partners. If an asset is acquired before date of marriage or after date of separation, it is presumed to be separate property.

Continuing with the example above, if the spouses separate before the vesting schedule has been completed, the RSUs vested would be entirely community while the RSUs not vested would be a hybrid of community and separate property interests, the latter becoming proportionally greater the farther away the vesting date is from the date of separation. This is the “time” requirement applied to dissolutions under California community property law. It directly affects characterization of the RSUs themselves.

Unlike the “time” requirement, the IPO is significant when it comes to settlement negotiations, not characterization. When parties are in the process of dissolution, they are usually assessing the community and separate property interests in the asset(s), and developing strategy to maximize the amount of assets they will receive and minimize the liability they will take.

In many divorces, these future interests are among the most valuable marital assets the parties are assessing and strategizing around. Yet before the IPO, it is incredibly difficult to determine their actual value because they are not yet traded on the open market.

“This creates enormous problems as well as opportunities for parties strategizing settlement,” explains Kamin.

Proactively delaying settlement until an IPO occurs is a common strategic move for either the employee spouse or non-employee spouse, depending on the company in question, the predicted value of the stock upon the IPO event, the information available to estimate the value the future stock, and the other assets/debts of the marriage. Same factors apply if a spouse is actively pushing the case toward settlement before the IPO occurs.

“Either way, when an employee of a company such as Zynga, Yelp, or Facebook is involved in or considering dissolution in California, his or her attorney should certainly be calendaring the date upon which the client’s employer expects to go public,” Kamin concludes.

For more information about how IPOs affect divorce cases, or any other family law matter, please contact San Francisco divorce attorneys Heath-Newton, LLP by calling (415) 992-5038, visit http://www.heathnewton.com, or stop by their office located at 240 Stockton Street, Suite 300 in San Francisco, California.

About Heath-Newton, LLP
Heath-Newton, LLP is a San Francisco family law practice focused on families. These San Francisco divorce attorneys pride themselves on working with clients from all backgrounds and lifestyles. Heath-Newton, LLP specializes in premarital agreements (prenups), same-sex marriages and domestic partnerships, divorce, child support, spousal support, adoption, and child custody in San Francisco and the Bay Area.

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Erik W. Newton
Heath-Newton LLP
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