If you work in California’s technology sector, your compensation likely extends beyond a base salary. Restricted Stock Units (RSUs) and stock options often form a significant portion of your net worth. In a divorce, these assets are often a major issue because California law generally considers them community property if you earned them during the marriage.
Distinguishing between RSUs and stock options
You need to identify the type of equity you hold, as the division method varies.
- Restricted Stock Units (RSUs): These are promises from your employer to deliver actual shares of stock to you after a vesting period. They hold value even if the stock price drops, provided it does not hit zero.
- Stock options: These give you the right to purchase stock at a specific “strike price.” If the market price falls below the strike price, the options may have no value.
Because RSUs have intrinsic value upon vesting, courts often treat them differently than options, which require an active purchase.
Applying the “time rule” formulas
Courts do not simply split unvested shares down the middle. Instead, they apply a “time rule” fraction to determine which portion belongs to the community and which portion remains your separate property. The specific formula depends on why your company granted the equity.
For grants intended to reward past service or attract you to the job, courts typically use the formula from In re Marriage of Hug. This calculation measures the time from your hire date to the separation date against the time from your hire date to the vesting date.
If your company granted the equity to retain you for future employment, the court may use the In re Marriage of Nelson formula. This calculation measures the time from the grant date to the separation date against the time from the grant date to the vesting date. This difference changes the percentage of shares you retain.
Addressing tax liabilities
You also face different tax consequences for each asset. RSUs generally trigger income tax immediately upon vesting, while stock options may not trigger taxes until you exercise them. Overlooking this future tax bill during settlement negotiations can result in an unequal division of assets.