Dividing tech compensation in a Silicon Valley divorce can become complex. Property division and determining spousal and/or child support during a divorce is already complicated, even when a couple’s income and financial holdings are relatively straightforward.
However, the situation becomes more complex, though, when one or both spouses work in the tech industry, where a significant chunk of their compensation may come not through wages reflected on a W-2 or cash bonuses, but in various kinds of deferred compensation that can be difficult to value and to divide. Particularly in startups, where cash flow may be limited but the need to recruit and retain specialized talent is high, some form of equity or stock options can be used in lieu of a larger salary or as bonuses to incentivize employees to make the company a success.
To understand the types of challenges that can arise in dividing tech compensation in a Silicon Valley divorce, it is helpful to look at some popular forms of compensation and employee benefits in Silicon Valley and the factors that can affect what is considered marital property. In this article, we’ll look at the general principles of property division and support in California and how they intersect with forms of compensation such as stock options, restricted stock units (RSUs), and retirement benefits.
- Timing Matters: Separate Property vs. Community Property
- Stock Options and Restricted Stock Units
- Retirement Benefits
- Boom and Bust: When Your Income Changes
Timing Matters: Separate Property vs. Community Property in a Silicon Valley Divorce
In California, assets you own before marriage, plus any individual gifts or inheritances you receive during marriage, are considered your separate property, which is not subject to division in a Silicon Valley divorce. Anything you acquire after separation is also generally considered separate property. Assets acquired during marriage by either spouse are considered equally owned by both spouses and must be split evenly (in the absence of a prenuptial agreement or other arrangement that states otherwise).
This period dates from when you got married to the date of separation (assets are valued as near as practicable to the time of trial, but the community’s interest in some assets accrues from the date of marriage to date of separation). The picture can become more cloudy if separate property is commingled with community property.
While this may seem simple, it can be much less so when considering deferred compensation. It is frequently the case that compensation such as stock options is not awarded all at once but vested over time. Exactly when these are granted and when they vest can determine what portion, if any, is considered community property. In addition, it can be extremely difficult to value assets that haven’t been vested yet or stock in companies that are not yet publicly traded. This makes having an experienced family law attorney essential for navigating the complexities of a Silicon Valley divorce.
Stock Options and Restricted Stock Units (RSUs) in a Silicon Valley Divorce
A stock option, simply put, is a form of equity compensation in which an employee is given the right to purchase a number of shares at a fixed price rather than the market price, usually after a vesting period. No actual stock is given, and generally, there is no requirement that the employee exercise the options. Restricted stock units (RSUs), by contrast, are stock that is granted to the employee but which can’t be sold for cash until it vests; the vesting period may be determined by how long the employee works at the company or by when they hit certain performance goals.
RSUs and stock options granted prior to marriage but which vest during a marriage can become, in part, community property to be split equitably between the spouses. This determination can also be affected by whether these benefits are considered deferred compensation for past work or incentives for future performance and how those periods overlap the marriage (or not). In addition, RSUs that vest after separation are W-2 income that can affect the amount of child or spousal support due. Because this income tends to fluctuate, in California, it is usually supplemental income treated like a bonus for calculating support. Another issue that can complicate division is whether the stock options or RSUs are transferrable—if not, the employee’s spouse may have to exercise options or sell stocks on their ex’s behalf.
While defined pension plans are largely a relic of the past, what happens to a 401(k) plan in divorce can be a serious issue. Like other kinds of community property, the contributions made to such a plan during marriage should be split between the spouses. (Contributions made prior to and after marriage are considered separate property.) To split a 401(k) without triggering avoidable tax penalties, you will need to use a Qualified Domestic Relations Order (QRDO) to assign a portion of one spouse’s retirement plan to the other.
However, California does not require that community property be split equally “in-kind,” so it is possible to buy your partner out or trade other assets in exchange for keeping the full 401(k). The situation also becomes more complicated if funds were borrowed from the 401(k) for any commingled assets—for example, if money was taken out for a down payment on a house.
Boom and Bust: When Your Income Changes
The hope in accepting employee benefits plans heavy on deferred compensation is that a big IPO will result in a lucrative payout down the line, but it doesn’t always work out that way. Many promising startups simply don’t pan out, and in 2023, there has been a considerable wave of tech layoffs in both public and private companies. If you’ve lost your job, you should act quickly, with the support of your family law attorney, to modify your support obligations while you look for work.
Your Family Law Expertise On A Silicon Valley Divorce In The Tech Industry
If you’re facing a Silicon Valley divorce and compensation is shaping up to be a thorny issue, knowledgeable legal representation is essential for identifying and mitigating the issues that can make it difficult to divide property and set support. The family law firm of Hoover Krepelka is experienced in the intricacies of complex property divisions, and we can help advocate for your equitable share of financial assets. To schedule a consultation with an attorney, fill out the form below.