Employee Stock Option Division and Valuation in Divorce

1. DIVIDING EMPLOYEE STOCK
OPTIONS IN DIVORCE
Thea Glazer, CFP, CDFA,
MS Accounting
858-485-
858-485-0814
thea@glazerfa.com
www.glazerfinancialadvisors.com

2. EMPLOYEE STOCK OPTION
DEFINITION
An Employee Stock Option (ESO) is
the right given by an employer to an
employee to purchase a specified
number of shares of the employer’s
stock for a specified price for a
specified time.
time.

3. IMPORTANT TERMS
• Optionee – the employee to whom
options are granted
• Exercise – to purchase stock using
an option
• Grant Date - the date the option
becomes the employee’s property
• Grant or Exercise Price - the price at
which the employee may purchase
the stock

4. IMPORTANT TERMS CON’T.
• Exercise or Vesting Date - the first
date the employee may use the
option to buy stock. It is common
stock.
for a single grant to have a vesting
schedule which sets out the % or #
of the options that become vested at
each vesting date
• Unvested Options – options that
have not yet reached their vesting
date

5. IMPORTANT TERMS CON’T.
• Expiration Date - the last date an
option can be exercised; if it is not
exercised;
exercised by then, it is lost and any
value is forfeited
• In the Money Options – options
whose fair market value exceeds
the grant price
• Underwater Options – options
whose grant price exceeds the fair
market value

6. TYPES OF EMPLOYEE STOCK
OPTIONS
• Nonqualified Options (NQs)
• Incentive Stock Options (ISOs)
Difference between NQs and ISOs is
tax treatment and transferability

7. NONQUALIFIED STOCK OPTIONS
• Exercise Generates Ordinary Income
• Transferable if Allowed by Plan -
Need DRO
• No Tax Consequences from Transfer
• “Alternate Optionee” receives 1099
Optionee”
• If Not Transferable, Employee Must
Exercise on Behalf of Spouse

8. INCENTIVE (QUALIFIED)
STOCK OPTIONS
• Are Not Transferable As Qualified –
Become Nonqualified If Transferred
Most plans do not allow transfer
• No Tax Upon Exercise
• LTCG if Held 2 Yrs. from Grant Date or
1 Yr. from Exercise Date
• May Create AMT upon Exercise – Dual
Cost Basis Tracking

9. THE PLAN DOCUMENT
Main Points Covered:
• What Type of Option
• Vesting Period and Schedule
• Transferability
• What happens if employee retires
• What happens if employee leaves
before retirement

10. Account Statements
Will Include:
• Grant Date
• Type of Option
• Grant Price
• # Shares Granted
• # Outstanding (not yet exercised)
• # Exercisable (vested)
• Expiration Date

11. VESTING SCHEDULES
Show the following for Unvested
Options:
Options:
• Dates of future vesting
• # of options exercisable at each
date

12. OPTION EXERCISE METHODS
• Regular - Pay Cash
• Cashless – Turn in Portion of Options
• Stock Swap – Turn in Previously
Exercised Stock

13. TRANSACTION HISTORY
Shows the following for Exercised
Options:
• Date of exercise
• # of options exercised at each date
• Trade Price
• Market Price
• Proceeds (Gross or Net)

14. STOCK ACCOUNT
Shows:
Shows:
• # of shares of previously exercised
options that are still owned
• Cost Basis of Stock
Was stock acquired with a stock
swap?

15. OPTION EXERCISES FOR
CORPORATE INSIDERS
• May be subject to blackout periods
and volume restrictions
• Creation of 10b5-1 exercise/trading
10b5-
plan solves restriction problem

16. TAXATION
• Nonqualified
- Taxed as ordinary income at time of
exercise
- May incur long or short term capital
gains tax when stock is sold
• Incentive (Qualified)
- No tax at time of exercise
- Long term capital gain if stock held 2 yrs.
from grant date and 1 yr. from exercise
- Exercise may create Alternative
Minimum Tax liability

17. DETERMINING THE COMMUNITY
PROPERTY SHARES
HUG Formula
or
Nelson Formula
Harrison Formula not used very often

18. HUG FORMULA
Used to attract new employee and
reward past service
Formula
# Days From Date of Hire to Date of Separation
÷
# Days From Date of Hire to Date of Exercisability

19. NELSON FORMULA
Intended as compensation for future
service and to keep employees
Formula
# Days From Date of Grant to Date of Separation
÷
# Days From Grant to Date of Exercisability

20. VALUING THE OPTIONS
• “In the money value” = Difference between
market price and grant price
• Black-
Black-Scholes Formula – Most Commonly
Used Method
Considers Time to Expiration, Stock Price,
Grant Price, Stock Volatility, Dividends, Risk-
Risk-
Free Rate of Return
• Binomial Formula
Similar to Black-Scholes but also considers
Black-
varying exercise dates

21. DIVIDING AND DISTRIBUTING
THE OPTIONS
• Deferred Distribution – Shares Risk
and Upside
- Divide the Community Options To Be
Exercised Later
- If Plan Allows, Set Up Account for
Non-
Non-Employee Spouse
- If Not, Employee Exercises For Ex
• Value Options and Trade Off For Other
Assets

22. RESTRICTED STOCK
Stock given to employee by employer
• No cost to employee
• Has vesting schedule
• Taxed as ordinary income upon vesting
• Less risky than options - cannot be
worthless

23. QUESTIONS?
Need help or more information?
Give me a call or send me an e-mail at
e-
858-485-
858-485-0814 (t), 858-205-2714 (c)
858-205-
thea@glazerfa.com