What to do with Stock Options in a Divorce with Kenneth Naes | Episode 111

Stock options become an issue in a divorce when they aren’t evaluated properly. Today we are joined by Kenneth Naes, financial advisor and stock option expert, to discuss stock options and how they affect a divorce. Tuning in, you will hear all about stock options and why they become a problem during a divorce. We delve into determining what the stock value is and whether it is marital or separate before discussing the importance of vesting as well as the difference between vesting and unvesting. 

Ken discusses the two main issues with stock options (risk and tax) and talks us through the time rule. We then go into complications that may affect Ken’s work and why providing the correct documentation is so imperative. Finally, we look into why the easy way out of dividing stock options at the time of divorce may make things more difficult in the long run. Do you want to find out what exactly stock options are and how to handle them in a divorce? Tune in to the Divorce at Altitude podcast to hear all this and much more!

Key Points From This Episode:

• What stock options are and why they are an issue during a divorce. 
• The process of determining if the stock value is property or not, marital or separate, and then what the value is.
• The importance of the vesting (to give a right to an asset) time frame. 
• Why companies want to become private and use strike price (a set price an asset can be bought or sold at any time.)
• Vesting versus unvesting (an asset you do not fully own yet) and some evaluation and tax issues for stock options.
• Who sets the guidelines for the particularities and performance goals of the stock price. 
• What is required for the valuations and how it’s determined for private companies. 
• Why an employment contract is a good starting point. 
• Stock option scenarios and what Ken thinks the issues with them are; namely risk and taxes. 
• How and why stock options are taxed and how they are paid for.
• The importance of providing the correct documentation. 
• Why dividing stock options at the time of the divorce may not actually make things easier. 

What is Divorce at Altitude? 

Ryan Kalamaya and Amy Goscha provide tips and recommendations on issues related to divorce, se

What is Divorce at Altitude?

Ryan Kalamaya and Amy Goscha provide tips and recommendations on issues related to divorce, separation, and co-parenting in Colorado. Ryan and Amy are the founding partners of an innovative and ambitious law firm, Kalamaya | Goscha, that pushes the boundaries to discover new frontiers in family law, personal injuries, and criminal defense in Colorado.

To subscribe to Divorce at Altitude, click here and select your favorite podcast player. To subscribe to Kalamaya | Goscha's YouTube channel where many of the episodes will be posted as videos, click here. If you have additional questions or would like to speak to one of our attorneys, give us a call at 970-429-5784 or email us at info@kalamaya.law.

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DISCLAIMER: THE COMMENTARY AND OPINIONS ON THIS PODCAST IS FOR ENTERTAINMENT AND INFORMATIONAL PURPOSES AND NOT FOR THE PURPOSE OF PROVIDING LEGAL ADVICE. CONTACT AN ATTORNEY IN YOUR STATE OR AREA TO OBTAIN LEGAL ADVICE ON ANY OF THESE ISSUES.

Transcript

Ryan Kalamaya (4s):
I'm Ryan Kalamaya

Amy Goscha (6s):
And Amy, Goscha

Ryan Kalamaya (8s):
Welcome to Divorce at Altitude, a podcast on Colorado family law.

Amy Goscha (13s):
The force is not easy. It really sucks. Trust me. I know, besides being an experienced divorce attorney, I'm also a divorce client,

Ryan Kalamaya (21s):
Whether you are someone considering divorce or a fellow family law attorney listening for weekly tips and insight into topics related to divorce, toe parenting and separation in Colorado. Welcome back to another episode of Divorce at Altitude. This is Ryan Kalamaya in a previous episode, how to episode, I described executive compensation and I referred to Stock options this week. We're going to get into what exactly Stock options are as well as maybe some other executive compensation issues. And we're going to hear from a financial expert, Ken Nayes on what those are.

Ryan Kalamaya (1m 3s):
So let me tell you a little bit about who can nays is for divorce practitioners on the front range. They will recognize Ken's name because he has been with cornerstone CPA group with Boris <inaudible>. Who's a well-known valuation expert himself, and will be a guest on a later episode. And Ken is frequently involved in valuation issues on closely held businesses as well as other financial issues. And he is a CPA himself. He spent the majority of his career working with large multinational financial services, such as Transamerica Jackson, national life insurance.

Ryan Kalamaya (1m 43s):
And he graduated from Rockhurst university with a bachelor of science in business administration and accounting. He has extensive finance, accounting and business development expertise, and he enjoys spending time outside with his wife and two sons, which is something that's near and dear to my heart, given my location in the mountains. So, but before I go on Callan, welcome to the show.

Kenneth Naes (2m 8s):
Thank you.

Ryan Kalamaya (2m 9s):
So for those listeners that don't know, can you give us an overview on what are Stock options and why are they really at issue in a divorce

Kenneth Naes (2m 22s):
Stock option is the, is a right. That's given to typically an executive by an employer to buy or exercise a certain number of shares of the company stock at a preset price, which is typically referred to as the grant price, the strike price or the exercise price. And that right is given for a certain period of time, which is typically called the exercise period. And the exercise period typically is 10 years. And why in a divorce is although the attorneys will make the argument and a judge will decide whether not those, those options are considered property, but that in a divorces, I guess the baseline take a look at the options, value them as property and determine how much of that property is considered marital versus separate.

Ryan Kalamaya (3m 17s):
Yeah. And for listeners that haven't listened to the how to episode it's number 1 0 6, but really what we're talking about. And I should've probably set some definitions at the beginning, but really the process that we're talking about is first, we needed to determine whether or not a Stock option is property in the first place. And then we would go to whether or not the property is marital or separate, and then we get into value and what the value is. So can, is it fair to say that you really get into both the marital versus separate property, which we'll talk about later on, but really the value of the Stock option?

Kenneth Naes (4m 2s):
Yes. My primary job is to value the options and that's a process as well as to determine how much of that would be considered marital versus separate property, which you apply the time rule for that just in general. Again, some more information about options. You know, most options are, are granted on publicly traded companies, but it is possible for privately held companies to design, you know, a similar option plan using their own pricing methods. The strike price that I was speaking of earlier is equal to the stock market's value at the time.

Kenneth Naes (4m 43s):
The option is granted typically, but not always. They can assign any price. They really want to be the strike price or exercise price, the strike price on a, a company that's private is typically based off of pricing from the most recent funding round. And again, Stock options typically expire after 10 years within that 10 year period though, there's typically a vesting period as well, but in general that's Stock options. And at the point that the options vest is an important date. The vesting period is an important timeframe because of that, those factors go into the marital portion versus the separate property portion.

Kenneth Naes (5m 30s):
It goes into the taxes and it also goes into the actual valuation based on the risk for the number of years, that there's a possibility that those options may not get paid.

Ryan Kalamaya (5m 42s):
And for those listeners who don't understand really why you would have such complicated financial jargon on strike price and stock options, why do companies, whether it a publicly traded company like apple or a closely held like a non-private company? I mean, we've seen Elon Musk, he's taking Twitter, private, or at least once too. So then you get into how much is Twitter worth. And if Elon Musk was going to give options to various executives that were working for Twitter, when it was private, why do companies even do this in the first place?

Ryan Kalamaya (6m 25s):
Can

Kenneth Naes (6m 26s):
That's a great question. The concept is that accompany wants to align the interests of the executive with the company goals. So options are based on pricing. So if you give a company gives an executive Stock options with a strike price of $10, the hope is that the executive is going to work his or her hardest to try to drive that the performance of the company, which in turn drives the stock price up because his or her options are going to be worth more the higher the stock price.

Kenneth Naes (7m 6s):
And I'll get into this a little bit more later, but it's a pat on the back to say, Hey, you're in a role either now or have been where we believe you have an impact on the company's bottom line directly. And now that you have that ability, we want to maximize your performance, which in turn we hope maximizes the company's performance.

Ryan Kalamaya (7m 29s):
So in other words, if the strike price is set out at $10 and then the company, because of the executive's contributions, in theory, the strike or the stock price is actually $15. Whenever the executive can exercise the option he or she is going to do so because the, he can buy stock at $10 when it's really worth $15. Is that a fair kind of summary?

Kenneth Naes (7m 59s):
Exactly.

Ryan Kalamaya (8m 0s):
So what is this Vesting versus unvesting in walk us through some of the things related to the valuation issues and tax issues for Stock options,

Kenneth Naes (8m 14s):
Stock options could be complicated and sometimes they can be complicated, but not as complicated. And that directly relates to Vesting. So the two primary issues with Vesting one relates to marital property versus separate property. But the other piece of Vesting is risk with a simple vesting schedule and executive just needs to be working at the company at the time. The vesting is complete for that specific traunch of Stock options. So as long as you're employed on that day, you will get your Stock options and you'll get a hundred.

Kenneth Naes (8m 56s):
There's also Vesting. That is performance-based. And it in a more detailed manner aligns the executives performance with the company's performance and a performance goal. Like that would say, let's say the vesting period is three years at the end of the vesting period. Again, this is simple example. The stock price needs to have increased 20%. If it increased 20% and the executives still employed at the company, then the executive is going to get a hundred percent of the options that were granted three years ago. So that's an added risk, right? What happens if the stock price doesn't go up 20%?

Kenneth Naes (9m 39s):
What if it only goes up 10%? A lot of the options schedules will still allow the executive to get a partial payment of those options. But certainly if the stock price doesn't go up at all, it's likely that the executive will not receive any of those options at the point of vesting. And there's other, I've seen some really strange company goals like a carbon footprint has the company reduced its far carbon footprint by a certain percentage or by a specific metric. There are a lot of strange things that they add that are what the company views as positives. That aren't necessarily a bottom line related recently with COVID.

Kenneth Naes (10m 20s):
I worked with on an executive compensation, divorce, post divorce, but one of the performance metrics was how many, what percentage of employees were vaccinated for COVID by a certain date? How many additional ones were by another date? And then also because it was a retirement community, how many of the residents needed to be vaccinated by a certain date and then additional ones by another date, which was kind of odd that certainly everybody that lived there, they were able to get like 98, 90 9% of the residents to get vaccinated easily within the timeframe, but getting the employees was a little bit more difficult, but

Ryan Kalamaya (11m 1s):
So typically can Who sets out these guidelines or the particularities for the conditions on the stock price

Kenneth Naes (11m 11s):
On a publicly traded company, you'll have people that a group of executives that deals directly with the board of directors and between the two groups with the board approving it, executive comp is, is really all of it is approved by the board of directors of a publicly traded company, but they do get direction from an executive board.

Ryan Kalamaya (11m 34s):
And you mentioned those private, the funding, the valuation for this private companies is what is required when they go through these valuations. Is that something that happens monthly or how are those determined for private companies?

Kenneth Naes (11m 55s):
Those are a bit of a pain in the behind yeah. A private company, depending on where it is, you know, what stage, but closer to potentially going public or are getting bought. They're more likely to have more activity, but the funding, it could happen every six months, once a year spread as they progress through that stage and then need funds, they'll go out and get funds.

Ryan Kalamaya (12m 23s):
So it for listeners, they know that we have our hypothetical divorce client, Eric Wolf. So if Eric Wolf works for a startup, a tech startup, then there could be Stock options that are granted. And really what they're going to go through is a fundraising. And they'll, they'll generate fundraising from venture capital or what are called angel investors, but is it 4 0 9 a or four and nine that they'll go through under the tax code and provide an updated valuation metric for the options.

Kenneth Naes (13m 1s):
Correct. And they options are, let's say a secondary piece of that. The primary reason for valuation is for that, that an equity that they're issuing in terms for the funds that are being provided.

Ryan Kalamaya (13m 16s):
So for listeners, I mean, we see these commonly in the, in these divorces, especially involving startups where 4 0 9 they'll they'll have. And, and they're problematic for you, Ken, because they often are kind of these Zillow based valuations that are just kind of formulaic that are different than evaluation for some sort of divorce on the company, really at issue. But the foreign nine 80 will say the stock price should be $10 a share. And then the options are granted based on that. So, but really it gets complicated. Can where, you know, the board or a private company or somebody else, they oftentimes these executives, they don't have a contract that outlines this, all that you have to really dig into, you know, an omnibus stock plan or an employment letter, or the summary plan description, a deferred compensation plan document.

Ryan Kalamaya (14m 15s):
Each company will create their own regime or own documentation related to the stock shots, Stock options, right? Yeah.

Kenneth Naes (14m 23s):
You're a hundred percent correct in the startups, the private companies, no, they haven't done it. You know, issue options multiple times over a period of years, they haven't gone through this process that much so documents, you can come across documents have been updated multiple times just trying to get it correct because they realized later, you know, something really wasn't exactly what they meant to be doing, or things have changed with the publicly held companies, especially larger, better you'll generally have, you know, the Stock option agreement, the restricted stock agreements, even though you do need to cross-reference.

Kenneth Naes (15m 3s):
And certainly a lot of them will reissue a plan document every year the information is available, but you did note something that I think is important, the employment contract, or is typically a place to start. So at least, especially if somebody has recently been employed, like in the past 12, 24 months, that gives you a, a good direction on what they were initially granted given promised, you know, in what regard they're held at the company coming in, and then there's a ton of other documentation that you want to look at related to this.

Kenneth Naes (15m 43s):
You know, I'm going to use a restricted stock example, but it would apply to Stock options as well. But again, just keep it simple. And this is, I would say fairly normal that you'll find that when an executive is granted restricted stock, part of the requirement, not of the restricted stock, but of the actual grant is that the executive needs to hold a certain amount of company stock at all times. And you won't know that unless you read through the restricted stock agreement in detail, you won't know what the performance goals, if there are related to stock options.

Kenneth Naes (16m 32s):
And again, unless you look at the individual restricted stock or the stock option agreement. And again, those can change from year to year, especially when you're dealing with say a carbon footprint, things change. They've maybe not made as much progress as they were hopeful. They know something's going on in the background and they'll adjust. So don't think that just because you've got one stock agreement, it applies to all years, things do change.

Ryan Kalamaya (16m 58s):
Okay. So Ken let's, let's get some examples here. So Eric Wolf works for some sort of tech company. He's given some stock options when he starts with that company. They are not vested, however, but there's two different kind of Stock options that he is given when he signs on to the tech company. One is based on how long he's with the company. And then another is based on performance. Can you walk our listeners through the different valuation issues or things that you would anticipate being an issue for purposes of Eric Wolf's divorce when those Stock options are at issue?

Kenneth Naes (17m 41s):
Yes. The two issues that tend to be disagreed, or let's say fought over, tend to be the amount of risk that's assigned to that Vesting and then secondarily taxes. The investing piece of it, lets say there's simple Vesting again, and there's complicated. Vesting simple Vesting is again that the executive just needs to be sitting there working at the company when the vest date hits. But let's say that that's three years from now, there is a risk that the executive gets fired the executive quits.

Kenneth Naes (18m 22s):
So you need to discount back to present value what the value of those options are in the future. When they've asked and you're going to discount that based on a rate of risk that's associated with the circumstances of that employment factors that can lead to determining that discount rate would be the strength of the company, the employment history of the executive, either at that company or at other companies, whatever that history might be. If there's performance goals you want to look at, have they used those performance schools historically, it's great if they have, because then you can request from the executive or from the executives company, how they've done against those measurements in the past to try to semi predict whether or not the company is going to hit those goals.

Kenneth Naes (19m 14s):
Because again, the performance goals, he might get a hundred percent of the vested options, or it may only get 50% depending on performance. So those are risk factors that need to be considered in the discount. And obviously the more risk, the higher the discount that's where typically an argument may come in in a divorce, one side says, well, they should be discounted 10%. And the other side says, oh, there's a lot more risk than you're giving consideration. That should be 20% and then taxes, believe it or not. There's an occasional argument over what the assumed tax rate should be.

Kenneth Naes (19m 55s):
And that argument can be based off of something. At least the kind of makes sense to say, well, the executive is going to be single is his tax rate last year or the past three years has been this and apply that to a single rate rather than married, filing jointly to come up with that rate. But people can say, well, you know, is this marginal or effective one would assume effective, which is your overall tax rate, but I've had people argue, no, it should be at the margin because this is above and beyond as extra income is additional income. However you want to view that.

Kenneth Naes (20m 35s):
So the tax rate, as you can see, contains some assumptions and it also contains an opinion on, you know, what the applicable rate should be. So again, will occasionally get arguments from the other side about tax rates.

Ryan Kalamaya (20m 52s):
So if Eric Wolf's working for a startup and he's given those two different kinds of Stock options that we talked about, if he is going to be with the company in the future, then we're going to be talking about marital versus separate and all I'll ask you. We can come back to that. But really if, if what we're thinking about is what's the risk of him being with that company. And there might be a particular kind of discount based on the risk that he may not even get these stock options because he might not stay with the company.

Kenneth Naes (21m 27s):
Right? And as a startup, it's even worse, right? The future of a startup is a lot more uncertain. And certainly there's not historical, not a lot of historical information to even know whether or not the company is going to hit its goals, go public or be, be bought. And certainly during that process, which is also true of public companies, but again, everything is riskier on a privately held company, especially a startup, but executives tend to get blamed when things don't go right. And it could be any one of the executives just to explain to the equity or the debt holders in a private company or the shareholders in a publicly held company.

Kenneth Naes (22m 15s):
Somebody needs to be blamed a lot of times and executives, a lot of times will not last at a company for a prolonged period of time. And again, there's that risk and that risk needs to be considered considered in the evaluation. So on even just a straight simple one, there is a chance you need to quantify that the best you can, that he will not be able to collect those options when they've asked.

Ryan Kalamaya (22m 39s):
And if Eric Wolf is working for a company that has a carbon footprint goal, then that might have a different discount rate for those particular options related to carbon footprint, because that's a different risk or different situation in terms of whether or not those options are, are going to become a reality because of, you know, it's a different metric of whether or not he will or will not get those options.

Kenneth Naes (23m 11s):
Exactly the number of numerations or possible inputs for any executive compensation plan are a little mind boggling. You know, at sometimes you might think that it's, it's relatively simple, but it's, it's not, if it's an international company, I have a client that when they were divorced or issuing stock options and restricted stock in three different currencies and us euros and pounds. So you need to add that as a factor too, you know, so, and you're looking at each one of these, I guess it's important to state that again, you're looking at each year that somebody is granted stock options.

Kenneth Naes (23m 56s):
Those stock options need to be looked at individually for that year, or again, just to add more complexity. Sometimes people are issued at one time options that vest over different schedules and you need to look at each bucket or traunch of stock options standalone and apply risks and other factors to those which might be different than options for next year,

Ryan Kalamaya (24m 25s):
As anyone that has listened to the, how to episode on executive composition frequently, what we see can is Eric Wolf will be issued options. And in his divorce, there'll be this issue on whether or not it's marital or separate property or even property to begin with. And I can tell you from experience that Eric Wolf or, you know, executive like Eric will, he's gonna really focus on Vesting and that can really matter for valuation, but it doesn't necessarily dictate what happens on whether or not those options are property or not. But let's set that aside.

Ryan Kalamaya (25m 5s):
Let's talk about Eric Wolfen and the time role. So for listeners that don't understand, can you walk us through what what's a likely scenario for Eric Wolf when he's got these options, you know, years out and he's going through a divorce with Melanie Wolf, what happens with the time role and what is that?

Kenneth Naes (25m 26s):
Okay. So going back to, I just want to reiterate again that you want to look at each group of options for each year. Again, this is another time where you're going to look at each batch or traunch of options that have been granted. The time role looks at the months of marriage during the vesting period compared to the overall vesting period that equals the percentage of the options that could be considered marital property. A simple example would be, let's say Eric was granted options.

Kenneth Naes (26m 6s):
Three years ago, he's married and they have a five-year vesting period. And all he needs to do is be employed at the company at the time, the options vest. So again, he was granted the options three years ago, he's married as of this date, but let's assume that he's going to get a divorce tomorrow. So 36 months of the best thing occurred while he was married. And then the remaining months he'll be divorced. And as a result that vesting portion will be considered separate property. And theoretically the same thing could happen on the front end that, you know, somebody was granted options before they were married.

Kenneth Naes (26m 51s):
But basically the time rule says how much of the best thing was done while you were married versus how much of the best thing was done when you weren't married. And you apply that percentage, the resulting percentage against the number of options, that's the time rule.

Ryan Kalamaya (27m 9s):
So the time roll will say that a certain portion of the options would be marital for when he worked for the company and spent the time going to work, and that would be marital, but then the other remaining Mount a separate property. And so would you, as an expert, if I called you Ken and said, Hey, I need you to give me some numbers. Would you come up with an overall value for the options or valuations for each year or each grouping of options? And then some of it would be marital and then the other portion would be separate.

Kenneth Naes (27m 48s):
Exactly. I would go through each traunch of options, value those options, and then apply the time, roll to that traunch, go to the next traunch, repeat. And again, apply the time, roll to that one because there's different timeframes, right? You're further into Vesting four options that were granted three years ago versus the ones that were granted two years ago versus the ones that were granted earlier this year.

Ryan Kalamaya (28m 15s):
And Ken, is it in your experience? So these options, they sound great. You get basically stock in whether or not they have to pay for it or not. So w w what happens if the executive borrows money to buy a stock option or uses separate property to purchase the options? I mean, there are all these complications can ensue. So what does that do to your work as evaluation expert on stock option

Kenneth Naes (28m 46s):
In general, some of what you're talking about would be tracing separate property, always entails tracing. And that is like, you're making my head swim, thinking about some of the separate property issues that I've seen, but yeah, Stock options are complicated enough. Once you start taking a look, if there's separate property that was used to buy the options, that'll that adds a huge layer. Tracing is time-consuming. And as a result, expensive as a side, but if you've seen a lot of executive compensation, a lot of companies will structure certain things for tax benefits and without getting into too much of it, because it really is complex and maybe a little boring because it is tax, but yes, companies will structure stuff where there might be what is considered that for tax purposes.

Kenneth Naes (29m 47s):
It really isn't debt. And related to the Eric scenario. Yes, that's an added layer of big added layer of complexity,

Ryan Kalamaya (29m 56s):
Right? Well, and I think that the other point of the conversation, if people are still listening is that it is, it gets, there's so many different variations and each company does things their own way. You have startups. I've certainly seen it where they have this idea of Stock options. And in theory, options make a lot of sense, cause it incentives, it aligns the incentives, but the actual application, it can get, it gets so incredibly complicated. And a lot of times these companies will come up with the idea of a Stock option. And, but then they lose track of the paperwork.

Ryan Kalamaya (30m 37s):
And then only after someone goes through a divorce and divorce attorneys start asking for the non-qualified employee stock purchase plan document, or the top hat plan document that someone realizes, you know, maybe they didn't dot their I's or cross the T's. And it's particularly a problem for the closely held companies, because not only do you have an argument about when there's Vesting and whether or not so that someone's actually gonna hit the particular threshold or requirement, but then on the back end, you have an argument over what is exactly this company's value. It's a little bit different.

Ryan Kalamaya (31m 18s):
If you have Google or apple where their stock is pretty well known, but when you have a startup, you know, these four, nine A's, I've seen them where, you know, the founders or, or executives in these startups, they have an incentive to go to fundraising, you know, venture capitalists. And to say, I have a billion dollar company, or I have a highly successful company. And of course, whenever they go through a divorce, they then are incentivized to say, this company is worthless and these stock options are worthless. And so understanding those different incentives and the understand the different valuations that exist out there, I think is really important because you can get into the weeds in terms of valuation and, but really understanding what the issues that are involved in the incentives.

Ryan Kalamaya (32m 9s):
Because I think that that risk and what you hear from the executive can, whether you represent the executive or you are on the other side. So let's say that you're hired by Melanie to value these stock options. It's the era Kaz. I think it's important to know what all is out there because it relates to risk. It relates to value and all of those things really matter, but you know, that you can get really, really in the weeds on this stuff. But I think a lot of these executives, or at least my experience has been that they generally kind of over simplify when it comes to the valuation, they just are like, oh, it's worthless, or it's not vested.

Ryan Kalamaya (32m 52s):
I don't understand why this is really that big of a deal. But then when you sit down with them and you say, Hey, part of these Stock options is marital and they can come up with a big number on a it's sobering and it takes some real tough conversations.

Kenneth Naes (33m 8s):
Yeah, I agree. And I agree that, you know, not all attorneys are created equal. Some are better at getting their clients to understand the importance of, of actually trying to dig up the, the correct information. This is a compliment to you, Ryan, because on some cases that I've worked, you have definitely made your client understand The importance of providing the correct documentation.

Ryan Kalamaya (33m 33s):
Well, I appreciate that because I think that these are really complicated issues. And I certainly have in the past, you know, just relied on what my client says. And sometimes that can really, they don't understand. And so one of the reasons of having this podcast of having an episode like this, and to bring in an expert like you can, is to really dig into these issues and provide some awareness because it can pivot the, these cases can pivot on what exactly the agreement or a variety of, of documents can say. And as you said, they are really complex.

Ryan Kalamaya (34m 13s):
And you know, that it's one of those things where it can really make a difference, whether or not, you know, I represent Eric or Melanie when you come in, but for people to really understand how these issues are at play. And I, I think your, your observation about the taxes is important for people to understand because that the tax rate, everyone can say, well, I know the tax rate, it's active, it's 30%, but then there's a disagreement between experts as to whether or not the 30% should or should not apply. And I also think it's interesting. One of the things I enjoy about my work is figuring out what are subjective decisions made in particular by experts.

Ryan Kalamaya (34m 59s):
So an expert, you could say that it's, that the discount rate is 20%, but another expert could say it could be 10% and there's real. No, there's not any firm decision or law that says it has to be this it's, it's kind of up to the experts. And to understand that that's a professional judgment, but it's, it's a decision that's made by a human being. And the same thing goes for taxes and really to understand where experts and where attorneys can disagree on these particular issues.

Kenneth Naes (35m 33s):
Yeah, I totally agree. The one thing I'd like to add though, that we really haven't talked about is in a divorce, you know, the whole valuation of stock options, along with any other asset, you're trying to, even out that marital balance sheet, you know, to whatever degree, whether it's 50, 50, 60, 40, whatever it is, right. But I've had cases where quote, to make it easier. And I say, quote, to make it easier. I'm not sure that it's easier, but I've had cases where they've awarded wife or husband X amount of the Stock options, X amount of the restricted stock and instead of value.

Kenneth Naes (36m 16s):
So it's such that, you know, one or the other receives all of the, the Stock options, they'll go ahead and say, yeah, when those vests you'll get your portion, that's complicated for each year where there's vesting out into the future, just to not think that it's that simple because there needs to be a tax true up because they need to share in those taxes in the future. And when those options vest, they're going to be all on either husband or wife, whoever works at the company, it's going to be, there's going to be withholding. It's going to appear on his or her tax return. So just as a note that dividing it up may make it easier at the time of the divorce, but will require an accountant into the future to determine the tax drug.

Ryan Kalamaya (37m 6s):
Right. And so I I've been in part of these in essence, in kind distributions or in kind division. So instead of Eric having his own expert can, and then Melanie have her own expert, and then they disagree on what the likelihood of Eric getting these, these Stock options in five years and what the tax rate's going to be in five years and what Congress is going to do. And all of that stuff, what they can do is Eric and Melanie can say, well, listen, we know that 30% of the Stock options were accumulated during the marriage. And if Eric gets them in five years, then Melanie will get a particular, it might be 15% because let's say they agree to half, you know, half of the 30% is 15%, but then they have to figure out, cause Eric actually gets them.

Ryan Kalamaya (38m 1s):
And you know, he's going to have to pay taxes on any sort of, you know, and it depends on if he was gifted them through his employment or he has to pay for them in cash, you know, whatever the case may be, but then they can at least true up, but they're going to have to seek a CPA. And I think having these sorts of agreements in detail, providing that there there's a dispute mechanism is helpful to know I've, I've certainly done it where people, Eric and Melanie, they wait and then five years, they have a neutral CPA that reviews it and, you know, explaining to Melanie, Hey, there's going to be some tax issues. And it's totally fair for us to account for those.

Ryan Kalamaya (38m 43s):
But your point Ken is that sometimes it can be more problem than, than it's worth, but it does certainly avoid the dispute on how much it's worth today. Correct?

Kenneth Naes (38m 56s):
I agree

Ryan Kalamaya (38m 57s):
Because if I'm representing Eric and there's a significant chances to start up, there's a significant chance that he's not going to be with this company in five years, then his understandable reluctance is going to be well, I'm paying her based on stock options that I will never see. So that is one of those risks that he may want to avoid by having an in-kind distribution. So again, it gets into incentives and really understanding how these issues work. But we're sorry we see them a fair amount, especially on the front range, because you know, a lot of tech executives TAC or, or other companies I shouldn't just classify as tech.

Ryan Kalamaya (39m 40s):
It is something that we heard a lot during the.com bubble would they have become, you know, more and more accepted within most publicly traded companies, if not private companies that are fairly progressive when they are trying to grow.

Kenneth Naes (39m 58s):
Exactly

Ryan Kalamaya (39m 59s):
So well, Ken, for those that don't know your info, we're going to have contact info in the show notes, but what's the best way to reach out to you if people have questions about stock options or tax or other valuation issues related to a collar or a divorce,

Kenneth Naes (40m 14s):
Either by phone or by email, both work totally fine. And you're going to post my, my email address.

Ryan Kalamaya (40m 21s):
Yes. Yeah. We'll have all that in the, in the show notes as well as the transcript. So can really appreciate the time. It's always enjoyable to talk about some complex stuff, even though it can be dry, but I appreciate the time and the expertise and insight.

Kenneth Naes (40m 40s):
I appreciate your time to

Ryan Kalamaya (40m 42s):
Everyone. This is Ryan again. Thank you for joining us on Divorce at Altitude. If you found our tips, insight or discussion, helpful, please tell a friend about this podcast for show notes, additional resources or links mentioned on today's episode. Visit Divorce at Altitude dot com. Follow us on apple podcasts, Spotify, or wherever you listen in. Many of our episodes are also posted on YouTube. You can also find me at Kalamaya dot law, 9 7 3 1 5 2 3 6 5 that's K a L a M a Y a.law.