The major problem all start-up businesses face is really a catch-22: Start-ups need hardworking, skilled employees who will help build the company and make it successful. Those employees, in turn, expect to be paid for their work. Unfortunately, cash is almost always low in the beginning phases of a start-up, which forces founders to come up with alternative ways of compensating these early employees.
To do this, a lot of tech start-ups and other companies are embracing employee equity — a system that provides the promise of stock options to an employee who meets certain criteria over time. Employee equity, such as stock options and restricted stock units, can become incredibly valuable assets, depending on the market and how well the company thrives.
Here in lies the problem, however: What happens to restricted stock units in a divorce? It’s a good question and one we can answer first by looking at what a restricted stock unit is.
What are restricted stock units (RSUs)?
Unlike traditional stock options that can be bought and sold whenever, restricted stock units, or RSUs, “represent an unsecured promise by the employer to grant a set number of shares of stock to the employee upon the completion of the vesting schedule,” explains a 2016 Investopedia article.
Typically, in order for RSUs to become vested, an employee must meet certain criteria that can include, but are not limited to:
- Reaching certain benchmarks in a job
- Remaining employed with the company for a minimum amount of time
- Receiving a promotion within the company
- Celebrating employment anniversaries
Once these or specified conditions are met, the specified amount of RSUs are vested and they are assigned a fair market value. Typically, they are then distributed to the employee.
Issues surrounding vesting schedules
It’s very important for individuals with RSU grants to understand the vesting schedule for their RSUs, especially if they are going through a divorce. While most RSUs give employees a specified amount of shares, they may not all become vested at the same time.
This becomes an incredibly important detail in California divorces, because unvested RSUs, while potentially valuable after vesting, are still an unsecured promise if employment conditions haven’t been met. If an employee terminates employment before meeting these conditions, they will likely have to forfeit their RSUs, making them worthless to the employee and non-employee spouse.
In order to properly value RSUs as a marital assets, employees and non-employee spouses must consider the vesting schedule not just in regards to RSUs that vested during the marriage, but also to determine the potential value of the unvested stock after divorce.
Because California is a community property state, which splits marital property equally between spouses, complex vesting schedules can require extra work on the part of the divorcing couple, oftentimes requiring help from a family law attorney and/or a CPA as well.