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Valuing stock options: What can we learn from the Bezos’ divorce?

Whether you are a fan of celebrity news or not, it is hard to ignore the divorce of Amazon founder Jeff Bezos from his wife MacKenzie. This has been a noted topic on many news forums since they announced their split via Twitter in early January.

While it is not every day that one of the richest people in America goes through a divorce, it is even rarer when the high-asset divorce involves an asset that can not only be difficult to value but difficult to divide during divorce proceedings.

Stocks and stock options: Valuing the unknown

It is not uncommon nowadays for tech companies – including Amazon – to incentivize job offers with stock options. While these stocks may be worth very little in the beginning – if anything at all – there have been many instances over the years where employees have suddenly found their stocks worth a considerable amount of money.

It is not a stretch to consider that the possible wealth associated with stock options can lead to two rather tricky questions, especially if a divorce is on the horizon: How are stock options valued and how is this wealth divided?

To answer these questions, one must first look at how the state differentiates between community and separate property. In California, for example, stock options earned during marriage will be considered community property.

Adding another layer of complexity to the matter is vesting schedules, which determine when an employee effectively earns the ability to buy stock that then becomes vested. Though California courts consider both vested and unvested stock to be subject to property division, the process of dividing stock options depends on time rules and their outcomes. The most commonly used time rules include the Hug formula and the Nelson formula, which are used in different situations:

  • The Hug formula is used in instances where stock options are part of an incentive program to attract an employee to a company or in cases where the stock options are a reward for long-standing or good service. The formula used in Hug is:
  • The Nelson formula is used when stock options will be granted to an employee after a certain number of years of service (ie: an incentive for staying with the company) or for stock options that are intended to be compensation once an employee reaches certain performance benchmarks. The formula used in Nelson is:

In addition to looking at the applicable time rule, courts will also look at the intrinsic value of the stock options when making a determination about the value of stock options.

Seeking assistance to deal with substantial assets

While many stock options offered to the average employee may not match the wealth of Jeff Bezos – who is estimated to be worth approximately $137 billion, stocks can become a substantial asset that could become a sticking point for divorcing couples. Seeking help from the right legal professional may be necessary, especially if a fair split of marital assets is the desired outcome.

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