California Law on RSUs and Equity
Choosing to work for a startup company can be a risky endeavor. Capital is oftentimes low in the beginning for startups, meaning company founders may not be able to pay early employees the salaries they are expecting. Instead, startup company founders must offer incentives and alternative compensation to early employees such as stock options and restricted stock units (RSUs) that have the potential for paying out big when the company finds its footing and flourishes.
Stock options like RSUs can be an incredibly valuable asset later on, but they are also a double-edged sword. There is no guarantee that there will be a huge pay out after they are vested. This is the major problem early employees have to consider, especially when divorce rears its ugly head. That’s because RSUs and other stock options can be considered community property in California, thus making them eligible for property division in divorce proceedings.
At the law office of Kaspar & Lugay LLP, our family lawyers have considerable experience handling complex divorce issues facing business owners, entrepreneurs, early and high-level employees and startup founders. Our years of experience successfully handling a wide variety of family law matters and our certified public accountant (CPA), family law attorney Brent Kaspar make us uniquely equipped to handle property division proceedings involving RSUs, stock options and other employee equity compensation.
The Difference Between Early Employees And Founders
While some people may consider the terms “early employees” and “founders” to be synonymous, there are actually slight differences between the two terms.
Founders typically refer to the people with the concept for the company and take the most risk early on. They also have the most stake in the company, typically owning a larger percentage of its equity, usually in the form of stock options and RSUs. As such, startup founders going through divorce tend to face more complex issues during property division proceedings because their stake in the company could be worth a considerable amount of money or very little if the company fails.
Early employees, on the other hand, typically receive monetary compensation from the onset as well as equity compensation, like RSUs and other stock options. Their risk is typically lower, but as is the case with any stock option, there is no guarantee that things will pan out and a huge payday is around the corner.
How Much Are RSUs Worth In A Divorce
If you’re going through a divorce in California and you have RSUs or have received equity compensation in other forms, you likely want to know how much your equity is worth so that you know how it will be divided in the divorce settlement. Unfortunately, there is no simple answer to this question for early employees, specifically those with RSUs.
Generally speaking, any assets or property acquired after the start of a marriage in California is considered community property that is then divided equally in a divorce. Unlike other stock options, RSUs may be difficult to valuate because of their unique nature.
A Brief Overview Of Restricted Stock Units
RSUs are a form of equity compensation in which the employee does not receive stock right away but rather receives a promise of stock units once a certain set of conditions are met, which can include but is not limited to staying with the company for a minimum period of time. Basically, RSUs give employees at all levels the incentive to stay with the company for an extended period of time.
Once the conditions are met, employees typically receive their stock units based on a distribution schedule, meaning they may not get all of their promised RSUs all at the same time. They may receive a portion of the whole until additional conditions are met. The stock units only achieve their value when they are vested, which follows its own schedule.
Once RSUs are vested, they are assigned a fair market value and are considered income for the employee. This value of RSUs can change, naturally, depending on the market value for the stock and how many shares have been vested.
Valuation Of RSUs
Because of distribution schedules and vesting plans, valuating RSUs in divorce proceedings can be incredibly complicated affairs that need to be handled on a case-by-case basis. Currently, there is no state legislation or court rulings that simplify the valuation process for RSUs, meaning proper valuation rests on the shoulders of experienced family law attorneys such as Brent Kaspar and Arvin Lugay, and their team of financial experts.
As a certified CPA and experienced family lawyer, Brent Kaspar understands the economic value of RSUs, both in their vested and unvested state, and the role this plays in property division matters. He takes into consideration all facets of RSUs, including:
- The number of units that were given in an RSU grant
- When the applicable spouse is expected to receive their stock options
- When the units will be vested based on the vesting plan
- Stock market trends that could dictate future value of RSUs
His experience and understanding of the law give him the unique ability to develop property division solutions that keep his clients’ best interests in mind while also protecting potentially their most valuable asset.
Put Knowledge, Experience And Passion On Your Side
If you’re an early employee, a high-level executive or received equity compensation in the form of RSUs for a startup company in California and are currently in the throes of divorce, talk to the lawyers at Kaspar & Lugay LLP. We have the knowledge and experience you need to properly value your assets and divide them properly.
To schedule a confidential consultation, call 415-789-5881 or contact us online. Appointments are available at any of our North Bay area offices, including our main office in Corte Madera.
