Division of stock options in a divorce can be one of the most complicated issues when attempting to fairly divide marital property. While stock options may be based on past job performance, they may also represent compensation for the retention of an employee or anticipated future employment for related services. Stock options granted in anticipation of future employment services create especially challenging obstacles to valuation particularly when the employer is a fledging enterprise with substantial potential for future success. These valuation challenges are compounded by the fact that the present value of the stock options may never be realized but the stock options still represent an asset that may be of substantial value.
Palm Beach divorce attorney James S. Cunha has the extensive experience and knowledge required to analyze the value of stock options as part of the property division aspect in a divorce. Our law firm has worked closely with forensic accountants and financial analysts in such cases to ensure that we obtain a proper valuation of stock options. The valuation and division of stock options is an increasingly important issue in divorce as many companies including tech companies, publicly traded companies and even closely held companies are increasingly granting stock options as a key form of compensation for employees. Stock options are a particularly common form of compensation for those in the management structure because it permits performance to be linked to compensation.
The difficulty in valuing and dividing stock options in a Palm Beach divorce is rooted in the nature of the asset. A stock option is essentially the right to purchase a fixed number of shares of stock at a designated price at specific times. The price at which the shares can be purchased (called the “grant” price) is usually the market price at the time the stock option is granted.
While there are multiple methods for valuing stock options, two are most common. The “intrinsic value” method calculates the value of the option based on the difference between the price at which the stock option can be exercised and the fair market value of the stock option when exercised. If the stock option grant price was $3 per share but the fair market value at the time the stock options are exercised is $50 per share, the intrinsic value of the options would be $47.
However, there are a number of limitations to the intrinsic value method so that it may not be the appropriate valuation method of stock options in your divorce.
The other method of determining the value of stock options which may more appropriate in your case is the Black-Scholes Method. However, this valuation method also has limitations though it is formally recognized as the appropriate approach to valuing stock options by the accounting profession. There are two parts to this method of calculating the value of stock options: (1) calculation of the anticipated benefit of purchasing the stock outright, and (2) calculation of the present value benefit of paying the exercise price in the future. The difference in these amounts is the value of the stock options.
When stock options are part of the marital estate, it is essential to seek the advice and legal representation of a divorce attorney who has the expertise and experience to properly value these important assets. No matter where you are located, experienced Palm Beach divorce attorney James S. Cunha and his legal team are just a phone call away.