Start-Ups and Equity Compensation
As experienced family law attorneys in San Francisco, we know that securing an equitable distribution of assets from a divorce is difficult—especially when assets are hidden or complex. Need guidance? Contact our law firm to schedule a consultation today.
In a thriving economic ecosystem like Silicon Valley, many new businesses (especially tech startups) can become incredibly successful. However, sustainable profitability can take two, three, or even five years to achieve.
In the meantime, early-stage startup entrepreneurs spend considerable resources trying to grow their businesses without breaking the bank. One way for startup founders to present attractive compensation packages to new hires without overextending their budget is by offering equity compensation.
Equity compensation is a type of non-cash compensation that gives an employee a financial and legal interest in their company. Depending on how successful the start-up company becomes, startup equity can be an extremely valuable asset—and one that is subject to division in the event of a divorce.
If you or your spouse received employee equity during your marriage and are now headed toward divorce, it’s critical to legal advice from an experienced family law attorney. This article will explain everything you need to know about startup companies and equity compensation in divorce cases, including the nature of equity compensation, the importance of accurate valuation, and more.
Are you struggling to get a fair divorce settlement? You don’t have to navigate it alone—let an attorney from Fenchel Family Law, PC, help you secure the compensation you’re owed. Call our law firm at (415) 805-9069 to speak with a knowledgeable legal professional.
What Is Equity Compensation?
Equity compensation refers to non-cash pay that is given to employees. This type of compensation transfers some amount of company ownership to the employee, often through stock options, restricted stock units, or performance shares, and typically becomes more valuable over time.
Under California divorce law, equity compensation that is acquired during a marriage is generally considered community property. That means if the marriage ends in divorce, equity compensation must be divided equally between both spouses, regardless of which spouse acquired it through employment.
However, dividing equity compensation in a California divorce case often requires detailed analysis from financial and legal experts. Here are some of the considerations:
- Valuation and division. Valuation of equity compensation in a divorce is no easy task. It includes numerous complexities, including the vesting schedule, the company’s current and projected value, restrictions on the sale of stock, and more.
- Length of time spent earning equity. When dividing equity compensation, it’s important to look at the period of time in which the employee spouse was earning equity. If they were earning equity before the marriage, an equal division between spouses may not be fair.
- Vesting and exercise of options. If stock options or restricted stocks are not yet vested at the time of a divorce, the court may order the division of these assets to be delayed until vesting.
- Tax implications. Dividing equity compensation can have significant tax ramifications for both parties, especially when stock options are exercised or shares are sold. These tax consequences must be factored into the division process to ensure both parties still receive a fair settlement after taxes.
- Negotiated settlements. Rather than pursuing litigation, some couples may choose to negotiate a settlement agreement, especially if they want to handle equity compensation differently than a 50/50 split.
It’s important to note that equity compensation earned after the date of separation is typically considered separate property and may not be eligible for division. Additionally, the existence of a prenuptial agreement (or a postnuptial agreement) will also affect how equity compensation is treated.
The Importance of Accurate Valuation
Equity compensation often represents a large or significant portion of a couple’s marital estate. An inaccurate valuation of this marital asset can result in an unfair divorce settlement and financial losses for one of the spouses.
Ensuring an accurate valuation, however, is more difficult than you might think. The valuation experts will need to take a variety of factors into their calculations, including the following considerations:
- The type of equity, amount of equity, vesting schedules, and restrictions on its sale or transfer
- The current fair market value of the company and its potential future value
- The tax implications associated with vesting or exercise
- Market volatility and other conditions that could lead to fluctuations in value
- Timelines of equity compensation division and how it impacts the assets
Ultimately, an accurate valuation of equity compensation is a critical component of a fair divorce settlement and helps ensure legal compliance. It requires expert knowledge in both financial valuation principles and the specific equity involved. If you’re concerned that your equity compensation is being inaccurately valued, your legal counsel can help you find the right specialists.
How a Start-Ups and Equity Compensation Attorney Can Help
Under California law, each divorcing spouse is entitled to half of the marital property, including equity compensation. However, securing it can be difficult, especially without expert legal services. Luckily, you don’t have to look too far for a San Francisco divorce attorney with experience in these matters—the team at Fenchel Family, PC, is here to help.
When you’re ready to partner with a legal advocate who will fight tirelessly for you, contact our law office online to schedule a consultation.