RSU in Divorce
Many companies in the Triangle offer shares of restricted stock to attract and retain employees. The restricted stock units, or RSUs, are redeemable after the employee has worked at the company a certain number of years or met certain performance goals.
The value of RSUs can become an issue when considering the equitable division of marital property in separation and divorce—especially if the RSUs are unvested. The value of a new company’s stock can fluctuate considerably. If the employee is not vested in the stock plan, it can be challenging to determine the fair value of unvested restricted stock units.
The divorce lawyers at Younce, Vtipil, Baznik & Banks work to protect clients’ financial interests as they go through separation and divorce and divide marital property. If you or your spouse has unvested RSUs that are considered a part of marital assets to be divided, we can help you with strategies for meeting the requirements of North Carolina divorce law in a manner that benefits you.
What Are Restricted Stock Units?
A restricted stock unit is a financial share in the issuing company, like any other company stock. The shares are “restricted” because they only attain value when the holder becomes vested in the stock plan and cannot be sold or traded beforehand.
By issuing RSUs as part of a compensation package and requiring years of employment or certain job performance milestones for the stock to attain value, employers use RSUs as an incentive to retain talent. Vesting may occur all at once (100% vested) or in stages, such as 40% of issued shares vesting at three years of employment and 100% at five years.
If an employee leaves the company before they are vested, they usually forfeit any unvested RSUs issued in their name.
Restricted stock units are typically issued over time and are assigned a fair market value when they vest. They are then counted as income, and a portion of the shares is withheld to pay the holder’s income taxes. The employee receives the remaining shares and is free to sell the shares or hold onto them in hopes that their value will increase. In publicly held companies, RSUs may convert to common shares of stock upon vesting.
Because RSUs have no real value until they vest, startups can issue them without immediate expense while capital is dedicated to building the new company. If the company fails, the value of the RSUs and the amount the company must pay out falls accordingly.
How Unvested RSUs Impact Your Separation Agreement and Divorce
One of the most contentious issues in a divorce is often the equitable division of marital property. The presumption is that the net marital estate will be divided in a manner that ensures each party receives a fair share. The marital estate is based on the total value of the assets and debts held jointly by the divorcing spouses.
In North Carolina, both vested and non-vested stock options are subject to distribution. If one spouse has been issued unvested restricted stock units, their disposition will become part of the separation agreement. This requires determining whether the unvested RSUs are marital property, and if they are, their value, and then how they are to be divided.
Are RSUs marital property?
Marital property is assets acquired during the marriage. RSUs are granted to an employee for specific periods of work or for performance during a specific period. If some of the unvested RSUs held in a spouse’s name were for periods before the marriage or after the date of separation, they could be excluded from marital property subject to distribution.
We would expect the judge hearing a separation agreement to look at the period the RSU was issued for, not the date of issuance. For example, if RSUs are accrued annually and issued each January but the couple separated September 30, two-thirds of the first RSUs issued after the marriage ended should still be considered marital property.
We would seek the spouse’s employment contract, employee handbook, and other documents to determine how restricted stock options are issued and the number of units issued in each grant of RSUs received so far.
How do you value unvested RSUs?
Obviously, the spouse who is to receive proceeds from their estranged spouse’s unvested RSUs wants them valued higher and the spouse holding the RSUs wants them valued lower at this point in time.
The simplest thing to do is to come to an agreement on a value. If other employees’ shares have vested, the company may be able to state a recent stock value. If the company is publicly traded, you could go by the current value of common shares, as well as financial statements.
If the company cannot provide helpful documentation, determining the potential value of unvested RSUs may require the services of a forensic accountant.
One valuation method, the Black-Scholes formula, produces a theoretical estimate of the value based on derivative investment instruments. Another approach common in North Carolina is the “coverture fraction,” typically used to value qualifying retirement plans. This formula divides the length of time a spouse was simultaneously married and earning stock options/units by the total length of employment during which the options/units were earned.
How do we divide unvested RSUs in a divorce?
There are two ways to divide RSUs once we have agreed to their worth:
- Buyout. The spouse who earned the RSUs keeps them and pays the other spouse half of the agreed-upon value.
- Deferred division. The spouse who earned the RSUs holds them until fully vested and then sells them and splits proceeds with their former spouse.
Neither choice is without risk. The spouse who agrees to a buyout could watch with no recourse as the value of the stock soared afterward. While waiting for a deferred sale, the company could go under or the spouse could become separated from the company before being vested.
Because the value of unvested RSUs is up for negotiation, another approach is to find another asset to give or receive in lieu of a stake in the unvested RSUs.
Contact Our Equitable Distribution Divorce Attorneys
There are multiple factors to consider when dividing restricted stock or other marital assets during a separation and divorce. The experienced Raleigh divorce attorneys at Younce, Vtipil, Baznik & Banks, P.A., can help you weigh all of your options and introduce you to strategies to protect your financial interests.