0192: How to Handle Stock Options During Divorce

Visit us at divorceandyourmoney.com for the #1 divorce resources in the USA and get personalized help. Learn about coaching services here.   Thank you for listening! Find a transcript of this episode below.   A subject that's been coming up a lot recently in coaching calls is stock options, and many of you have them and you may not realize it, or you do know they exist, but you're trying to figure out what you should do with stock options. And stock options are actually a pretty complicated subject. They're one of the most complicated financial instruments even when the divorce process isn't involved. And when you add divorce on top of it, trying to decide what you do with the stock option, whether you keep them, split them, how do you negotiate for them? They're tough.   I remember when I was much younger, I still have on my bookshelf an old book about stock options and it is one of the hardest to read books that I've ever purchased because they are a very complicated subject. But because it's the podcast, I'm going to, of course, simplify it for you and try and make it as easy as possible. And I want to give you an overview of stock options, what to think about with them in the divorce context.   Some of you may have them and not realize you have them. Some of you might not have them at all, and which point this episode might just be some general education on stock options, or maybe you know someone who's a friend who has them. But I'm going to go through kind of what they are, how they work, why they're important. They're one of those assets in divorce that if you have them, they can be very, very valuable. In some cases, I've had cases were stock options are the most valuable asset in the divorce and other times, stock options can be worthless. They are a very fascinating subject in that regard.   But let's start with the basics. And by the way, in my book, Divorce And Your Money, The No Nonsense Guide, I have a short chapter on stock options that explains what these are and why you need to be thinking about them. What stock options are, I call them stock options or employee stock options, it's a form of compensation and basically, it gives you a right but not an obligation to buy a certain number of shares in a company, in the company that you work for usually, at a specified price.   Now, what does all of that mean? It basically means that stock options give an employee the benefit or give employees the opportunity or the ability to benefit when a company goes up in value. Stock options also give an incentive for an employee to stick around at a company rather than leave. And the way it does that is it says, "Hey, you get a certain percentage or you can buy shares of stock at a discounted," I won't call it a discounted price, but you can get stock in this company and appreciate in its growth.   And if you are or your spouse is an executive in a company, but don't have to be an executive, can be at many different levels, but most of my clients are generally executives or pretty high up in a company when they think about options. You can have these stock options there and it says you're a part owner in a company, basically. There's some specific mechanics to it that make them a little bit more complicated than just being a normal owner, but they basically give you ownership.   And if you're at a public company, in a company will usually have thousands of employees, it has a stock market ticker. You can look up the price for it. I know lots of people who have stock options at public companies. They're a very common form of compensation. Actually, even when I was working at my very first job out of college, I was working at JP Morgan and they gave stock options basically to everyone as a form of compensation and to keep you at the company longer. You get a big bonus of stock options.   And then if you work at a private company, and so this is the private company side is actually pretty complicated when it comes to stock options, but if you work at a private company like a tech startup. At the time of this recording, I'll give you an example of a big name. Uber is a tech startup that you've all heard of. Well, most of their employees have lots and lots of stock options that could be very, very valuable. They are a sign of ownership in the company and it's a big form of compensation for the company.   And so at the end of the year, or at a certain time during the year, a company might say, "We're gonna give you part of your bonus in cash and part of your bonus in stock," and those stock are usually in the form of options. Now, the reason options are tricky is because of something called vesting. I'm not going to get into all the mechanics of vesting because it's just so complicated and it really varies on a case by case basis. But just because you have these stock options doesn't mean you have ownership in the company yet. As I said, they're still called options.   And because of this term vesting, it's basically just says that you don't own, you don't get a full value of your options just because you have them. You might get your options awarded to you the longer you stay at a company. So if you got $100 worth of stock options, well maybe only $10 have value today, but if you stay at the company for five years, you earn the rest of that money and you get the full value of those options.   So the point is that, I know this is difficult to grasp, but stock options are a piece of ownership in a company. They have a vesting schedule, they call it, but they vest and so you earn that ownership usually the longer you stay at that company over time. And if you leave the company before your stock has vested, that stock becomes useless.   That's not a point we're going to get into for the sake of this episode, but oftentimes in negotiations, when you're thinking about stock options and what you should do with them, if you or your spouse or whomever is going to leave the company with unvested stock, then that will become useless to you. Something very important to think about as well.   So whenever you have stock options, you're going to need to know that they exist and also you're going to need to know their vesting schedule. Now, that's just some basics on the stock options. Now, the real question is, what happens in a divorce context? The real thing to understand in a divorce context is the way you treat stock options in divorce varies substantially on one factor.   And that is, if your spouse is working for a private company, a company that's not listed on a stock market, whose shares don't trade every day, then the way you approach stock options in divorce is very different than if your spouse works for a public company. If your spouse works for a company like Bank of America, or Walgreens, or Best Buy or Walmart, or any number of big companies, there's also tons of publicly traded companies you may have never heard of before, but you can go online, you can look up their stock symbol, and you'll see a specific price for the share.   If your spouse works for a publicly traded company, then stock options are much, much easier to deal with. If your spouse works for a private company, then the stock, or you I should say, then the stock options are much more complicated in terms of how to split them in the considerations you should be thinking about as you try and figure out what to do with them.   Now, I was going to start with a public company example. So when I worked at JP Morgan, they gave stock options a lot. And basically, you can go online and you can type in, you can go to Yahoo Finance or Google Finance. You can type in "JP Morgan stock price" and you can look up the exact value of what each stock option is worth. And so if I had 10 ... So as of the time I record this, JP Morgan stock is worth about $100. Very easy. It's good for our math.   Let's just say they gave me a 10 shares of stock as part of my bonus. They actually give much, much more than that, but let's just say they gave 10 shares of stock as part of my bonus and options. And so I have 10 shares of stock at a stock price of $100, which means I have $1,000 worth of stock options. Well, if you are trying to figure out what to do with those stock options, that is a pretty easy thing to figure out because one of the biggest challenges with any asset is trying to figure out what it's worth.   Well, with a publicly traded stock, you know what the stock price is, you know how many shares of stock you have, and you just do some basic math and you come up with a value. In my case, I've got 10 shares of stock at about $100 a share. So I've got $1,000 of stock that I would have to split. Not much fancier than that. The only thing that's complicated is usually the math isn't that easy, but it's not much harder than that.   Where the complication comes is if your spouse works for a private company, and I've actually had this discussion on calls quite a bit, is the difference between a private company and a public company. Just so that you know, is private companies aren't listed on a stock exchange like the New York Stock Exchange, or the American Stock Exchange, or the Nasdaq or whatever. And so the value of the company isn't traded every day. And if you want to ... You can't just look up how much the company is worth.   A public company has a share price and you can buy and sell the stock every day, but the good thing about a public company is you can always look up what the market value is at any given time. With a private company, it might just be a few people who own it, might just be the employees who own it, or might just be an investment firm that owns it, and they won't necessarily tell you the exact value. And so when you're dealing with private company stock, the considerations get much, much more complicated. The reason is you don't know how much that stock is worth. The challenge with private company stock is valuing it. Private company stock, I'm not going to get into all the mechanics of it because it's way beyond what we could do and talk about in an episode that's useful to you, but one thing to consider, one thing that's weird about private company stock is it has no value until someone gives it a value. Now what does that mean?   Well, you can have private company stock. You can have 10,000 shares of private company stock that's worth one penny a share. So in theory, it's not worth that much, but what happens is with private companies, they might raise money from investors, in which case that penny a share that I talked about could become worth, all of a sudden, $2 a share instead of a penny a share. And so what was almost worthless before is now worth millions of dollars.   Or if that company gets bought, or if that company does any number of different transactions, those stock options, while initially on paper aren't worth anything, could become very valuable in the future. Private company stock is very weird in that regard. And when we think about it in a divorce context, it's one of the areas that causes a ton of complication because of this very issue. I had to work with a lot of attorneys on it, a lot of clients directly, and educate you that private company stock is a very complex area and thing to deal with and you have to be careful with it.   Let's just go through quickly what the difference is between private and public company stock in a divorce context and how you think about what you should do with it and try and come up with the best decision for you. If you have a public company stock or the company's traded, you can look up its value, you know the value. The value is clear. There's no real reason to split the stock and go through the complicated splitting process for stock options. It's usually not worth it.   Best thing to do is the person who has the stock keeps it. The person who doesn't have the stock gets credit for it, and you give up a little bit more of another asset to make up the value. But that's it. When it comes to ... It's simple. You treat the stock like a car. If you really want part of a publicly traded stock or you really wanted to split it, here's what I always say.   You can open up an e-Trade account, or a TD Ameritrade account, or a Schwab account or whatever and in five minutes, purchase that publicly traded stock. It's a very easy thing to purchase and there's no reason to add thousands of dollars of fees and complication trying to split publicly traded stock most of the time, or stock options most of the time. It's just not worth the effort. There's so many simpler ways to deal with it than splitting it.   When you're dealing with a private company stock, that is a very tricky area because we don't know what the value is. And so in general, most of the time when we're dealing with private company stock, you split it in half or you split it in whatever proportion you're splitting the assets. The reason is private company stocks value can fluctuate so quickly, so instantaneously that if you don't take your half the value, you could end up losing out quite a bit.   And there's definitely a lot of complications around it because it depends on how big the private company is and the mechanics of splitting the stock, et cetera, et cetera, but what the current value is of that stock. But many times, I see cases where the spouse who has stock options says, "Oh, these are worthless. We don't need to worry about the stock options. Let's just move on." And in theory, at the time they say that, they actually might be true, but the reason they have stock options is because they could have a lot of value later.   And so at this private company, it's a tech startup or whatever. I had a case like this this year where the person works at a tech company, the stock options aren't worth very much, but all of a sudden, a big investment firm in the middle of the divorce process, thankfully, comes in and says, "Hey, we're going to buy this company." And all of a sudden, those stock options which were worth a few thousand dollars at best, became worth hundreds and hundreds of thousands of dollars overnight and became a much bigger issue.   It sounds weird because it is, but that's also how stock options work, is oftentimes their value can fluctuate substantially, particularly with private companies where they're fast growth, valuing them as very, very difficult. And so the easiest way to get around that is by just splitting them evenly and therefore no one can lose out.   I'll give you another example, is if you are, say your spouse have stock options and the stock options are currently worth $1,000. Well you say, "Oh, I'm going to skip the stock options. I'm just going to get my share in the house and move on." Well, what if two years from now those stock options are worth a million dollars? How are you gonna feel about that? It's such a weird example, but that's how stock options can work.   Now also on the opposite side with stock options, this is something to consider, is they can also lose value. So you could say, "Actually, I want my share of those stock options," and it turns out the company goes bankrupt and they're worth nothing. So that's also a consideration as well. The point is there's a lot to think about if you have stock options. And if you're in the divorce process, you need to make sure you know that they exist and you really need to think through all of the different scenarios that could happen with these stock options so you can figure out, well, what is the best course of action for you later down the line with the options?   There's a lot of creative solutions that you can come up with for this very complicated asset. I hope I gave you a basic overview. It's not an intuitive subject and it's tough to explain and tough to explain clearly, but give you a basic overview of stock options. And if you have them, it's definitely an area, whether you have them or your spouse has them or you think you have them, it's definitely an area where you need to raise a red flag, make sure everyone has clear information as to exactly how they work, and from there, there's a lot to be thought about in terms of the divorce process, in terms of stock options and what the best strategy is for handling them.   It's an area that most attorneys, actually, I know aren't super well equipped to handle. Some are. There are definitely a handful of great attorneys out there who are super financially savvy who know the ins and outs of stock options better than me, but the average attorney off the street, certainly not. And actually, even many financial advisors, even good ones, don't know how to handle stock options well. And there's only a handful of people who really have good expertise in the stock option world.   If I were actually going to ... I'm going to leave you with a nugget. I love to give you resources and things to check out. One area or one person who's very, very good with stock options is a certified financial planner, a CFP. If you or your spouse have stock options and you're thinking about what to do with them in divorce, of course you can call me.   But there's also local certified financial planners who can help you think about the calculations, walk you through all the ins and outs of stock options in your specific scenario, and help you figure out, what are the best courses of action given this highly complicated, highly unusual asset that actually, a lot more of you have and you don't even realize that you have it or maybe you have an inclination that you have it but haven't really given thought to it in the divorce process.   So you can get a CFP, certified financial planner, contact me, or make sure you have an attorney who is very savvy in terms of the ins and outs of stock options because they are one of the most complicated areas for you to think about.