Private Stock in a Divorce
Getting a divorce can be a complicated and emotional process. If you or your spouse have stock options or shares in a pre-IPO company, dividing these assets adds another layer of complexity. Because the valuations for either aren’t always readily available, these holdings can be difficult to split. How they’re handled largely depends on the US state laws that apply to you, as well as the specific type of equity involved.
What Counts as Marital Property
In America, most states treat marital property in one of two ways:
Community Property States
In states like California, Texas, Washington, and others, almost everything a couple earns or acquires during their marriage is considered “community property.” This means it’s owned equally by both spouses, regardless of whose paycheck earned it or whose name is on the asset. When it comes to divorce, community property is usually divided 50/50.
Equitable Distribution States
Most other states follow “equitable distribution.” Here, assets acquired during the marriage are considered “marital property” and must be divided fairly, but not necessarily equally. A judge will look at many factors, such as how long the marriage lasted, each person’s financial situation, their health, and their future earning ability, to decide what’s just.
Regardless of your state’s approach, stock options and shares that were granted or earned during the marriage are almost always considered part of the marital property that needs to be divided.
Challenges for Division
Stock options and shares, especially those from private companies, can be tricky to divide because they often come with conditions.
Vesting Schedules
Many options and restricted shares “vest” over time, meaning you earn the right to them gradually. If options or shares were granted during the marriage but haven’t fully vested by the time of divorce, courts could use special formulas to determine what portion is considered “marital property” (earned during the marriage) versus “separate property” (earned after separation).
Opaque Valuations
Shares in a private company aren’t traded on public stock exchanges. That means there’s no easy way to figure out their exact value, and you might need to hire a financial expert like a forensic accountant to do this work for you.
Tax Implications
Exercising stock options and selling shares comes with significant tax consequences, and you might incur income tax, capital gains tax, or alternative minimum tax (AMT) depending on your circumstances. Your divorce agreement should clearly state who is responsible for these taxes to avoid future disputes.
Company Rules
Private companies often have regulations about transferring shares, including “right of first refusal” (ROFR) clauses, which means the company has the first right to buy back shares if an owner tries to sell them. These rules can affect how shares can be divided or transferred during a divorce.
Lower Liquidity
Private company shares can’t be sold as easily or as quickly as public stock, which can make division between spouses more complicated. One solution to convert your vested stock options or shares into cash can be to place a sell indication on an investment platform like Mirai Capital, which shows you eligible buyers.
How Stock Options and Shares Could Be Divided
Once the portion of the options or shares considered “marital property” is determined, there are a few common ways they might be divided:
Buying Out a Spouse
In this case, the spouse who holds the options or shares keeps them entirely. To balance this out, the other spouse receives an equivalent amount of value from other marital assets, such as cash, real estate, or other investments.
This method gives both parties a clean break, as the non-employee spouse doesn’t have to wait for the options to vest, the company to go public, or for a sale to occur on an investment platform like Mirai Capital. The employee spouse retains full control over the equity. That said, it requires an accurate valuation of the options or shares, which can be hard for private companies. The spouse buying out the other also needs to have enough in the bank or in assets to cover the value of the stocks.
Deferred Distribution
With deferred distribution, the options or shares remain with the employee spouse, but the non-employee spouse is granted a right to receive a percentage of them “if, as, and when” they vest and are sold. The actual payout won’t happen until the options are exercised and the company has an acquisition or IPO, or the shares are sold on an investment platform like Mirai Capital.
This spreads the risk and reward of options and shares between both spouses, and doesn’t require immediate cash or assets to cover the value of the stocks, like in a buyout. It’s often used for unvested options. On the downside, the non-employee spouse may have to wait years for the stock to vest, and there’s no guarantee the options will ever become valuable as the company might fail or the stock price might drop. It also requires ongoing communication and trust between ex-spouses.
Transfer of Shares or Vested Options
If company rules allow, a portion of the employee-spouse’s shares or stock options might be transferred directly into the non-employee spouse’s name. This method is less common, as stock or options may be non-transferrable.
The benefit of the transfer is that it provides direct ownership for the non-employee spouse. However, many private company plans restrict who can own shares or stock options, and if the transfer happens, it’s important to consider any future tax implications, if applicable.