This article was published in Family Law News (Fall 1998). In the version that appears below, the charts have been corrected.

Reprinted with permission of the author

Introduction

Apportionment of stock options and stock subject to repurchase as community and separate property in California dissolution of marriage proceedings pose complex problems for family lawyers and courts. Trial and appellate courts have considered alternative formulas to characterize and apportion options between parties when the options or the stock are not vested at the time of separation of the parties. This article is an analysis of the case law on stock option apportionment formulas and an evaluation of specific formulas used by trial courts to divide options and stock subject to repurchase.

Terminology

Stock options: Stock options are contingent rights given to employees of a company and other service providers to purchase stock of the company at a price set at the time the option is granted. The option holder does not have to put up any money for an option until the time that options are exercised. An employee is not required to exercise an option so the right has no element of downside risk if the stock has failed to increase or actually decreased in value following the time of the grant. Usually, the employee does not have a vested interest in the stock until some time period or periods have run. If an employee with options leaves the company prior to a stated time period, the right to exercise some or all of the options is lost in most option contracts. The conceptual approach is that employees will have incentive to work hard for the company to increase the value of the stock and will stay employed with the company in order to be able to purchase the stock. The latter concept is often referred to as "golden handcuffs." In startup companies in particular, options are a way of having key employees work for less than a market salary in the hope of bigger rewards from the increase in value of the stock.

Stock subject to repurchase: Stock subject to repurchase is similar in concept to stock options and governed by the same basic provisions of federal tax law. An employee is given the right to purchase stock, usually at a price equal to the then current market value. The company has the right to repurchase all or part of the stock from the employee if the employee leaves the company. The amount subject to repurchase (sometimes called forfeiture in the cases) usually depends on the amount of time the employee stays with the company. At some point in time the company's right to repurchase ends. Some companies prefer to use stock subject to repurchase as opposed to options because management believes that the employee feels more an "owner" of the company than an option holder. The employee can also obtain potentially preferable tax treatment on the shares since post-exercise option appreciation is generally taxed at capital gain rates. Some companies extend a loan to the employee for purchase of the stock. For the sake of simplicity, this article will primarily discuss the more common stock option, but the same principles generally apply to stock subject to repurchase.

Grant Agreement: A grant agreement is the document that gives an employee or service provider the option to purchase shares of stock of the company. It sets out the terms of the option and sets the time when the option or options may be exercised.

Exercise: Grants of options contain a date after which all or part of the options given an employee can be exercised and the stock purchased. The employee has no right to exercise the option before that time whether it is vested or not. There is usually an exercise period during which time the employee must exercise the options or lose them.

Vesting: Stock options are vested when the employee has a non-contingent right to retain the stock acquired upon exercise of the option.

Block or Portion: These terms are not clearly defined in the cases and are a cause of many of the problems discussed below. In this article, a block or portion is defined as a group of options within a single grant that vests on the same date. For example, if a grant gives an employee 300 options vesting 100 each year after the date of grant, the grant contains three blocks (or portions) of options containing 100 options each.

Acceleration: A company may accelerate the vesting and/or exercise rights under an option grant to an earlier date. This is sometimes done when the company is purchased by or merges with another company.

Deferral and repricing: The price of an option can be changed to a lower price if the stock has decreased in value below the option purchase price. When this is done, vesting and exercise dates are often deferred to a later date in order to have the employee make some form of sacrifice for the benefit of the lower purchase price.

Qualified and non-qualified options: Options may be qualified or non-qualified under federal tax law. Qualified options receive different tax treatment and allow for more creative tax planning and potential application of long term capital gains tax. They do not result in any tax consequence to the grantee of the option until and unless the option is exercised. Non-qualified options do not meet the requirements for the same tax treatment under federal law. Either type option can result in application of the alternative minimum tax. The difference does not affect ownership of the options but can affect valuation if the options are not divided in kind.

Time rule: The time rule or timeline method for dividing options has been used by all of the trial courts in cases which have reached appellate review. All of the appellate cases have sanctioned some form of timeline division of options. The court sets a timeline which it determines is the earning period for the stock options. The options are then divided by a formula which apportions the options on a timeline basis determining what portion of options have been earned during the period the parties were married and not separated and are, therefore, community property. Options earned after separation or before marriage are then determined to be separate property pursuant to general family law principles and Family Code §772 making earnings after separation, separate property.

Earning period: The "earning period" for an option is a term coined by the author. It is the period during which a court determines that any single option, block of options or portion of options is earned by the employee for purposes of application of Family Code §772 and applying a time rule. The earning period determines whether certain options are community or separate property or subject to apportionment in cases where options are earned partly before and partly after the parties separate or before they were married.

Apportionment Formula: The apportionment formula is the actual formula used by a court under a time rule to equitably apportion options between community property and separate property.

Development of Apportionment Formulas

Background and Issues

In the early 1980s some lawyers practicing in Silicon Valley raised the issue of stock options being earnings and, therefore, subject to the law that earnings before marriage and after separation are separate property.

Prior to 1984, there were no cases on apportionment of stock options. There were a number of potential issues relating to stock options granted to a married party.

1. Are stock options earnings and therefore subject to apportionment as partly community earnings after marriage and before separation ?
2. Is there any community interest in options which are not vested during the time the parties were married?
3. During what period are particular stock options actually "earned"?
4. What formulas for apportioning options are within the reasonable discretion of a trial court?

Trial courts considering the first option cases had to consider the above four issues when they were raised and decide whether and how to apply the reasoning from cases with analogous economic issues. The precursor of the option cases was the California Supreme Court's decision in Marriage of Brown, (1976) 15 Cal.3d 838, 126 Cal. Rptr. 633, a divorce case involving pension rights. The husband took the position that because his pension was contingent on completing a yet unfinished term of service, it was not vested in the community and his wife had no right to any part of the pension as community property. The Supreme Court ruled that vesting is not a requirement for a community interest in a deferred benefit. The Supreme Court sustained the trial court finding that the pension was earned over the period of time the employee worked for the employer and that the wife was entitled to a prorated share of the pension based on the portion of time the parties were married. If the contingency failed, neither party would collect the pension but if it were met, wife would receive her pro rata share.

The principles enunciated in Brown were applied in Marriage of Judd (1977) 68 C.A.3d 515, 137 Cal Rptr. 318. Although the major argument was over an annuity, another issue in the case involved husband's contingent stock account which was not vested. The court awarded the account to husband saying it was a mere expectancy not subject to division in a divorce. The appellate court reversed and remanded the case to the trial court citing Brown and the principle that future employment benefits subject to a contingency are contractual rights and therefore a form of property subject to equitable division.

In the first California stock option case, Marriage of Hug (1984) 54 C.A.3d 780, 201 Cal. Rptr. 676, Justice Donald King set out the basic principles for apportionment of stock options which have been followed in all of the subsequent cases:

1. Earnings of a spouse during marriage are community property and the fact that options are not vested or exercisable does not preclude apportionment of the options if some portion of the contractual right is determined to be earned during marriage. Section 5118 of the Civil Code (now Family Code §772) applies to stock options. Post-separation earnings of a spouse are the separate property of that spouse and options are earnings. (Although no appellate case has had to consider the issue, it seems apparent that options earned prior to marriage are also separate property.)
2. Trial courts have broad discretion to select an equitable method of allocating community and separate property interests in stock options granted prior to separation and not fully exercisable or vested until after separation. The purpose of any method of division is to achieve substantial justice between the parties considering all of the facts and circumstances of the case.
3. Time rules for division of options are appropriate. No single formula is required or approved. Justice King recognized that a single formula would be promotive of settlement but notes that "to do so would be to follow the recent tendency of appellate courts and the Legislature, which we decry, to adopt rules which on the surface are easy to apply and foster consistency yet, as applied, too often achieve inequitable results."
4. It is appropriate to award each spouse a portion of benefits as they are paid.

The cases after Hug follow the principles but not the formula set out in the decision. As in Hug, option holders in two subsequent cases argued at trial that there is no community interest in stock options until they vest or are exercisable or both. This position has died hard and the author's experience has been that the argument continues to be made at the trial level by angry option holders and perhaps overzealous lawyers. The "all or nothing" position has uniformly been rejected by California appellate courts.

All of the reported California cases have followed a timeline apportionment of options and stock subject to repurchase. The trial courts have attempted to use formulas that apportion options to the community which were earned while the parties were married and not separated. In doing this the court must determine the beginning and end of the earning period and then apportion by a formula which meets the principles of equity and justice set out in the Hug case. Actual division may be in kind or by value.

When Does the Option Earning Period Begin?

Marriage of Hug involved division of options to purchase shares of Amdahl Corporation. Husband went to work for Amdahl on November 9, 1976 leaving a position with IBM where he lost contingent deferred benefits in changing jobs. The parties separated before all of the Amdahl options were vested. The trial court found that the option plan was adopted to attract and to retain employees. The trial court allocated a portion of the options as community property based on a fraction, the numerator of which was the time from commencement of husband's employment to the date of separation and the denominator was the time from commencement of employment until the options were exercisable. On appeal, husband agreed that a timeline formula should be applied but argued that the time when the numerator and denominator should begin was the date of grant of the options and not the commencement of employment.

Justice King stated that the formula used by the trial court was reasonable in the circumstances of the particular facts of the case. The apellate court did not sanction the formula applied for use in all option cases. The decision determined that facts in the Hug case justified some weighting prior to the grant of options because Mr. Hug had left benefits at IBM and the trial court found that the promise of options was an inducement to change employers. The time rule used in Hug is illustrated as follows:

In Marriage of Nelson (1986) 177 C.A.3d 150; 222 Cal. Rptr. 790, the trial court utilized a formula to apportion options in which the numerator was the number of months from the date of grant of each block of options to the date of the couple's separation, while the denominator was the period from the time of each grant to its date of exercisability. Mrs. Nelson took the position on appeal that the trial court's allocation was not proper because it did not start the timeline for apportionment at date of employment as was done in Hug. The appellate court found the apportionment formula used by the trial court was within its discretion. The opinion states: We find nothing inequitable in the formula adopted by the trial court; in fact, under the circumstances of this case it was probably a better method of division." In a footnote, the court points out that there was no evidence to show that the option grants were to reward performance prior to the grant. The case does not discuss "vesting" and it is the recollection of the attorney for Mrs. Nelson that the date of exercisability and vesting were the same. The timeline used in the Nelson case is illustrated below:

The appellate decision in Marriage of Harrison (1986) 179 C.A.3d 1216, 225 Cal. Rptr. 234, was a review of a case tried prior to publication of the Hug or Nelson decisions. The trial court apportioned the options in accordance with a formula which had a timeline beginning with the date of grant of each option and ending with the date on which the right to exercise the option vested. As in Nelson, the appellant wife asserted that the formula used in Hug was the appropriate formula for division of the options and that the date of husband's employment should have been the start of the timeline used. The appellate court approved the trial court timeline beginning at the date of grant, not employment, noting that there was no evidence to indicate that the options were granted to attract Mr. Harrison or for services rendered prior to the grant. The decision stated that the trial court found that the purpose of the options was "golden handcuffs" to assure that husband would stay with the company. The appellate court agreed with the principle of Hug that no single formula must apply to all cases.

The Hug, Nelson and Harrison decisions each look at the distinction between options used to attract an employee and options used to retain an employee as guidance for when the timeline for the earning period of the options should commence. The facts of any individual case can be examined to see if the earning period begins before the date of grant. Examples where this might happen are when the options are used to attract an employee (particularly if the employee gives up deferred compensation with another company by changing employment), are clearly given to reward past performance, or when an option is rewritten with a new timeline for vesting.

In the Nelson case, the trial court found that the earning period for options ended on the date that the options were exercisable. The Harrison case included three options to buy stock subject to repurchase. Each such option was granted prior to separation with an immediate right to buy stock. The stock was subject to forfeiture if husband left the company or was terminated for cause. The forfeiture provisions lapsed in 20 percent increments starting two years after the stock was issued and thereafter an additional 20% of the stock became vested each subsequent year. The appellate court modified the trial court formula used for the restricted stock to make the timeline run from the date of grant until the date of vesting rather than exercise. The appellate court noted that the trial court formula using date of exercise, if applied literally, would give the community more than 100% of the stock in some instances.

The importance of the appellate court's change was the determination that actual vesting is the proper end of the timeline if exercisability precedes vesting. The court in Harrison cited and analogized Marriage of Brown, the leading pension case. "In family law cases involving retirement benefits 'vested' has been defined as 'a pension right which is not subject to a condition of forfeiture if the employment relationship terminates before retirement.' (citation). Eugene's non qualified stock options present an analogous situation." The court states that the timeline could start at date of employment or an earlier date than grant if supported by the evidence. It is also important to note that the Harrison court treated stock subject to repurchase exactly the same as an option in applying a timeline.

The same issue relating to the end of the earning period for options was decided in Marriage of Walker (1989) 216 C.A.3d 644; 265 Cal.Rptr. 32. Justice Sheila Sonenshine, an experienced family lawyer who wrote the Walker opinion, noted that the Hug decision sanctioned no particular rule or formula and agreed that trial courts should have broad discretion to achieve equitable results under the facts of each case. She then went on to find that the trial court in Walker "abused its discretion in failing to apply the Harrison formula. It relied on the date the options were exercisable rather than the dates the stocks became vested." (Emphasis added by the court.) She distinguished the Nelson case formula which set the earning period from the date of grant to the date of exercisability from the Harrison formula, which set the earning period from the date of grant until the date of vesting. The only issue actually decided was the correct closing date for the option earning period.

The time rule used in Harrison and Walker is illustrated below.

The earning period for options will usually end with the date of vesting. Exercisability, if different from the date of vesting, does not normally enhance or diminish the contractual right of the employee to the asset. Lawyers and experts can still urge a different ending date based on reasonable evidence showing that a different date would be more equitable in the circumstances of the case.

Once commencement of an earning period is determined for a grant, the court must decide an equitable way to apportion the options in each individual grant. Because a number of options or blocks of options are granted at the same time, the date of grant does not necessarily determine when each option or block is being earned. In this area, issues are apparent which were not raised or discussed by the parties in the cases appealed to date. While it might appear that the issues should have been apparent, the focus or emphasis on appeal in all but one of the decided cases was on whether or not the community had any interest in unvested options.

The appellate cases considering stock options are relatively recent. All of the cases except Walker were tried before there were any appellate cases on option apportionment for guidance. In all of the cases only one party used an expert witness to present an apportionment formula. It is important to determine what the issues in each case were, what the holdings were, and what was dictum. A careful reader of the cases should be reminded of the legal principle that if an issue is not raised in a case, a pronouncement of the appellate court on that issue is not entitled to stare decisis. This admonition may seem pedantic, but it is important in the option cases where potential issues were not raised by the parties and not addressed by the courts.

The Harrison court reasonably decided that vesting, not exercisability, should be the end of the timeline in that case, but the devil of the Harrison decision is in the detail. The appellate court set out the apportionment formula used by the trial court in a footnote:

"[Katherine's] share is to be obtained by creating a fraction, the numerator of which will be the total number of days between the signing or granting of the option agreement and the date of separation, the denominator of which will be the total number of days from the signing or granting of the option agreement and the day on which each portion of the option became fully vested and not subject to divestment. The ratio created by such fraction will be divided into the gain on the stock option on the date of exercise to determine the community property interest therein after reimbursement for the purchase of the option and any taxes paid by [Eugene] thereon in connection with the exercise of the option." (Emphasis added.)

The trial court's quoted language has created a great deal of controversy among experts testifying in option cases and attorneys advocating a client's position. The language has given rise to a debate over "cumulative" versus "sequential" vesting. Cumulative vesting means that each block of options within a grant is treated as having a separate earning period beginning with the date of grant and ending with the date of vesting. The C.P.A. expert who testified for husband treated each portion of options vesting annually within each grant as having separate vesting periods (cumulative vesting). The trial court followed the only expert's computation. Apparently, no one thought of the possibility of using a sequential vesting formula. (If wife's counsel did, he was wise enough not to raise the point which would only hurt his client.) The concept of sequential vesting was not an issue in the case at trial or on appeal.

To illustrate, consider a hypothetical case:

1. 300 options are granted to an employed spouse on January 1, 1995.
2. There is no issue of the earning period being extended back before the date of grant.
3. 100 options vest at the end of each year following the grant date.
4. Date of separation is June 30, 1996.

An expert following the Harrison formula would say that the first block of 100 options is fully earned and all community property. The second block earning period would be January 1, 1995 to December 31, 1996 or 24 months. The expert would calculate that this block of options was 18/24 community property. By the same reasoning the final set of options would be earned over three years and would be 18/36 community property. We will call this a cumulative formula and it is illustrated by the following diagram.

An opposing expert could give the perfectly rational opinion that the first block of options have an earning period of January 1, 1995 to December 31, 1995, the second block have an earning period of January 1, 1996 to December 31, 1996, and the third block have an earning period of January 1, 1997 to December 31, 1997. The result is all of the first block are community but only 6/12 of the second block are community and none of the third block are community property. We will call this a "sequential" formula and it is illustrated by the following diagram.

Although the decision in Marriage of Walker (1989) 216 C.A.3d 644; 265 Cal.Rptr. 32 may be correct on the issues before the court, language and appendices in the appellate decision, and the failure of husband to raise important issues have resulted in arguments that the decision sanctions the Harrison cumulative vesting formula. The case involved husband's options, some of which became exercisable before they were vested. The alternative positions taken by Mrs. Walker's expert, also a C.P.A., followed the various timelines of the previous cases and is shown in the appendix to the decision. All of the positions were strongly favorable to wife in that they ran the earning period for each block of options that vested from the starting date until the date of vesting of that particular portion of options and each portion was shown to be earned cumulatively during overlapping periods. The trial court in choosing between the alternative formulas presented by wife's expert found that the earning period for the options ran from the date of grant to the date the options were exercisable. No testimony or argument was offered for a sequential vesting formula.

It is apparent in reading the Walker decision that Justice Sonenshine was not saying that a cumulative formula must be followed in all cases, but rather that the formula used by the trial court in Walker was wrong in applying an earning period that was mathematically incorrect on its face. The appellate court stated that the correct earning period ran from the date of grant to the date the stock vested with the husband/earner in situations where the option was exercisable but the stock was still subject to repurchase by the company until the date of vesting. The cumulative formulas of the expert were not challenged by the appellant or discussed by the appellate court. The court simply substituted the correct earning period dates (ending with the date of vesting) into the expert's computation affirming the judgment as modified.

At trial, Mr. Walker apparently did not contest the expert's cumulative formula preferring to argue that all unvested options or stock were his separate property. He apparently did not raise the basic issue that the expert was a C.P.A. who simply presented alternative formulas. He did not offer any expert to contest the formulas presented by the accountant. On appeal, as a fall back position, Mr. Walker objected to the earning period used but still pushed his all or nothing position. He failed to challenge any other specifics of the expert's formula. Mr. Walker won on the issue of the earning period but better success at trial and on appeal may have resulted from a more moderate and logical approach challenging the cumulative formula and presenting a sequential formula.

The formula used in the Walker case could have been challenged on the basis that it unfairly "front weighted" the earning of options and did not track the reality that the employee did not really "earn" the options in the periods presented by the expert. The position would be that each portion or block of options was earned by Mr. Walker if he worked another year after the previous block was earned. The economic reality to Mr. Walker was that his contract rights in each grant of options vested in segments and were earned serially over required periods of time following vesting of the previous block of options rather than each segment being earned simultaneously until it vested.

To bolster the sequential position, an expert or percipient witness, or counsel in cross examination and argument, could point out that sequential vesting reflects the economic reality to the employee and to the company since the employee has nothing relating to the second and third block at the end of the first year and the right to any further stock is dependent on work done in the second and third year segments. In fact the sequential vesting position has been taken in many trial court cases and settlements with a substantial degree of success. Many, if not most, judges and lawyers find it difficult to see how work done in the first year earns a part of the second and third set of options. It seems more logical that each day of work over the entire option earning period earns and results in an equal interest in the number of options vested.

Consider an analogous situation involving an employment contract. A CEO is hired under a three year contract for $3,000,000 payable $1,000,000 at the end of each year. If the CEO leaves during any year, no further payment is due. The CEO is married at the beginning of the contract and the parties are separated one and half years later. The non-earning spouse claims that all of the first year income is community, half of the second year payment is community income, and one third of the last payment is community income. It would be difficult ,indeed probably impossible, to convince a court that the CEO's earnings were not $1,000,000 each year, but isn't that exactly the same position made in advocating cumulative vesting of options?

The results in our hypothetical case are even more contrasting if the options vest monthly or daily. Block vesting, sometimes called "cliff vesting" has resulted in acrimony from employees and litigation with the employer when the employee is terminated resulting in the loss of options. Shorter vesting periods soften the harsh effect of cliff vesting and have been increasingly used in the market. The expert in Walker dealt with monthly vesting and took the (uncontested) position that each monthly segment vested on a separate timeline starting with the date of grant. Changing the hypothetical case above to 300 options vesting monthly over three years, the result would be that 50% of all of the options would be vested at the date of separation and 50% to 95% of all of the remaining 150 options not vested at separation would be community. To illustrate:

Options vesting July 31, 1996: 18/19 community or 95% community

Options vesting Dec. 31, 1997: 18/36 community or 50% community with all other monthly blocks somewhere in between.

Extend the hypothetical to daily vesting and the cumulative position becomes even more extreme. If the parties are 50% down the timeline at the date of separation, a cumulative approach results in 75% of the options being community property. The author has never seen the daily cumulative vesting argument successfully made in court when it has been opposed. Assume that an employee is granted 365 options vesting daily over one year. Isn't it obvious that one option is earned for each day worked?

The pension cases are analogous to options, and the option cases looked to them for guidance. Pension cases routinely measure vesting sequentially without any element of front loading, although the cumulative argument could be made. If a spouse earned a pension over 20 years and the parties were married the first ten of the twenty years, it could be argued that 50% of the pension was already earned at the end of the first ten years and then that the first ten years should be counted in measuring all interest in the remaining portion of the pension. This would result in a total 75% community interest in the pension just as in the cumulative daily option position.

At the trial level, attorneys representing option holders should carefully present any important evidence of the intent of the company and then have an expert give an opinion. While Hug and the subsequent cases can be interpreted to sanction any formula, the logic of cumulative formulas seems strained. The underlying position is that although the employee receives equally valuable contract rights in equal segments over the vesting period, the rights are somehow "earned" less each year, month, or day depending on the vesting interval despite the fact that the employee receives no tangible reward for the front-weighted earnings if employment is terminated.

A counter to the sequential formula position can be made that it is more equitable to use a formula that does "front weight" the earning period and that the appellate courts in the Harrison and Walker cases seemingly sanctioned this approach. The author chooses to believe that the Mr. Walker suffered from not having his own opposing expert testify at trial to counter his wife's expert, and then by appealing in propria persona. There is little doubt that an appellate court could and probably would find a sequential earning period formula finding within the broad discretion of the trial court.

Some lawyers argue that the formula used in the Harrison case is equitable because there is an element of reward for past performance in the granting of most options. If this is correct, the cure is to start the earning period earlier than the grant date rather than apply an arbitrary front-loading formula. Most options are more like a raise and are another form of increasing compensation. While good past performance may justify a raise or grant of options, companies give both to retain good employees who are expected to perform well in the futures.

The author has discussed the "intent" and "purpose" of companies with corporate securities counsel who draft option grants and with company founders and founding directors. Most have said that under the hypothetical discussed above, they consider 100 options "earned" in each separate year and that is how they would testify. Others have admitted that they never considered the issue but felt that "intent" was irrelevant since the practical result to the company and employee is that the rights to the stock vest sequentially.

Assume that one director testified that 100 options were to keep the employee working for one year, 100 to keep the employee working for two years, and 100 for three years. Another director might testify that 100 were for work done the first year and to keep the employee that year. The second 100 would be for work done the second year and to keep the employee that year, and the third 100 would be for the third year. No matter what either director (one the brother of the non employee spouse and the other golfing buddy of the employee) testifies, the result is exactly the same to the employee and the company. This raises yet another issue - whether or not evidence of intent is important evidence or whether the practical effect of the formula should be the important test, particularly when the intent of the company has zero effect on the company in a divorce situation.

While a semantic argument can be made that options are "earned" on a cumulative timeline as characterized by the expert in Walker, the logic is questionable unless strong facts to support the cumulative position can be proved. One can argue that options are earned in a method that results in front loading but it is difficult get around the reality that the front loaded early part of the claimed earning period in such a formula is ethereal in that the employee doesn't have anything nor does the company owe anything until the second year commences and is completed. If the employee works all of the first year, the employee vests 100 options, for working a second year, 100 more, and for a third year 100 more.

Another illustration of the sequential earning vs. cumulative earning problem came up when the author was drafting language for treatment of stock options for the Lawgic California Pre/Post Marital Agreements computer program. The author's first reaction was that a fair formula would be that the new spouse would receive a proportion of the options granted equal to the time married from date of grant to date of vesting divided by the total time from date of grant to date of vesting. But if the "front loading" view succeeded in a divorce involving a first spouse, the two spouses together could get more than 50% of the options.

The appellate cases clearly state that a court can use an equitable formula to apportion option rights dependent on the facts of each case. If evidence is presented that each portion of stock is actually earned sequentially, one after another, the author believes that courts will follow that pattern in most cases. Expert opinion and testimony from company representatives can explain that there is no more work required for the vesting of one option or another in the sequential approach. That still leaves the door open to a cumulative approach where there is substantial evidence to prove a different purpose in the option grant. No doubt some experts will propound the cumulative position, but unless it is bolstered by other evidence of company purpose, it is a questionable approach. For now, the cumulative vs. sequential formula issue has not been raised on appeal in a case involving conflicting evidence.