It is increasingly common for Houston-area executives to have equity compensation from more than one employer, either because they changed jobs during the marriage or because they left a company and still hold unvested awards from their previous employer while accumulating new awards at their current employer. When these awards come from different companies, on different vesting schedules, with different plan documents, and under different tax rules, the property division process becomes substantially more complex.
Why Multiple Employer Awards Create Problems
The community property characterization of each award must be analyzed separately and independently. An award from a previous employer might span pre-marriage, marriage, and post-divorce periods all at once, while an award from the current employer might be entirely community property. The Texas Family Code section 3.007 formula must be applied to each individual grant, not to the combined award packages.
Each employer’s plan documents will also impose its own restrictions on transfer, its own procedures for recognizing court orders, and its own limitations on when and how shares can be disposed of. Some companies, particularly publicly traded ones, impose insider trading restrictions through blackout windows and section 16 reporting requirements that can restrict when stock can be sold for months at a time.
Documenting All Awards
The starting point is comprehensive documentation. For every employer from which an executive spouse holds equity awards, the following materials should be obtained:
Every grant agreement, award letter, or notice of grant for every outstanding award, going back to grants that have not yet fully vested. The plan document and any prospectus or summary plan description for each plan. Current brokerage or stock administration platform account statements showing outstanding units, shares, and options for each grant. Vesting schedules and performance metrics for unvested awards. Any insider trading plans (Rule 10b5-1 plans) that are in place.
Without this documentation, it is impossible to apply the section 3.007 formula accurately or to identify which awards are community property and which are separate property.
Tax Stacking Across Multiple Awards
When multiple awards from multiple employers are vesting in the same tax year, the tax consequences can be significant. RSUs from one employer vesting in January, NSOs from a former employer being exercised in March, and performance shares from the current employer vesting in October can all generate ordinary income in the same year, potentially pushing the executive into higher marginal rates and triggering the alternative minimum tax or the net investment income tax. Settlement agreements should account for these interactions and not simply divide gross award values without considering the stacked tax burden.
For background, our articles on unvested stock options in high-net-worth divorce and RSUs and PSUs address specific award types in more detail.
Coordinating Division Orders Across Multiple Companies
When awards from multiple employers must be divided, a separate division order or acknowledgment may be needed for each employer’s plan. Some plans accept domestic relations orders similar to QDROs. Others simply require a court order directing the employee to hold the community share in trust and pay it over when the award pays out. Neither approach is uniform across all plans, and submitting the wrong form to the wrong plan administrator can delay or invalidate the division.
Working with a Houston divorce attorney who is familiar with equity plan administration, and ideally coordinating directly with each employer’s stock plan department during the divorce process, gives both parties the best chance of an enforceable outcome. It is also worth noting that some plans require spousal consent for certain transactions even during the marriage, and gathering that documentation early can prevent disputes later about whether required consents were obtained.
Executives in Houston and the surrounding communities of Katy, Sugar Land, Spring, The Woodlands, and Cypress who have worked for multiple employers often have award packages that reflect years of career progression. Each of those awards deserves individual attention, and collectively they may represent the most significant financial asset either spouse will ever deal with in a legal proceeding.
Blog 158: The Challenges of Dividing Pre-IPO Equity in a Texas Divorce
Houston has a growing technology and energy startup ecosystem, and professionals employed by pre-IPO companies in Katy, Cypress, and The Woodlands increasingly hold options or restricted stock in companies that have not yet gone public. Dividing pre-IPO equity in divorce is one of the most challenging property division problems in Texas family law, because the assets may be worth millions or essentially nothing depending on how the company’s story ends.
What Makes Pre-IPO Equity Difficult
The fundamental challenge is valuation. A publicly traded company has a market price that changes every day, and while that price still involves judgment about future prospects, it reflects what thousands of buyers and sellers are willing to pay right now. A pre-IPO company has no such price. Its shares are illiquid, its value is speculative, and accessing that value may require years of continued employment before a liquidity event occurs.
Pre-IPO companies are required under Internal Revenue Code section 409A to obtain independent appraisals of their common stock fair market value for purposes of pricing stock option grants. These “409A valuations” are conducted by credentialed appraisers and provide a defensible estimate of common stock value at a point in time. They are, however, just one data point. A 409A valuation for a Series B startup may value common stock at $0.50 per share while the preferred stock sold to investors is priced at $2.00 per share, because preferred stockholders have liquidation preferences and other protections that common stockholders lack.
Other relevant reference points include the most recent preferred stock financing round (the VC valuation), any secondary market transactions in the company’s shares, and the company’s own financial projections. None of these is definitive, and competing experts routinely assign very different values to the same pre-IPO equity.
Community Property Characterization
Texas Family Code section 3.007 applies to pre-IPO stock options and restricted stock just as it does to publicly traded equity. The community fraction is determined by comparing the employment period during the marriage to the total vesting period. If the company goes public after the divorce, the non-executive spouse may have a claim to a portion of the IPO-date value of their community share, subject to whatever lockup restrictions exist.
Transfer restrictions are a significant practical issue. Most pre-IPO plan documents prohibit any transfer of options or restricted stock to anyone other than the employee, including to a former spouse under a court order. Courts can order the employee spouse to hold the community portion in trust for the former spouse and pay over the proceeds when a liquidity event occurs, but the practical enforceability of that obligation depends on the decree being well-drafted.
Handling Lockup Periods After an IPO
Even after a company goes public, shares issued to employees under equity plans are typically subject to a lockup agreement, usually 180 days, during which insiders cannot sell their shares. This means that a former spouse who is entitled to proceeds from an IPO cannot receive cash immediately upon the offering. The decree needs to specify how the lockup period is handled, what happens if the stock price moves significantly during the lockup, and who bears the market risk between the IPO date and the lockup expiration.
For more on handling restricted equity, see our article on restricted securities in divorce settlements.
Getting Professional Valuations for Pre-IPO Equity
When pre-IPO equity is a meaningful component of the marital estate, both parties should insist on an independent business valuation expert rather than relying solely on the company’s most recent 409A or the last VC round price. An experienced business valuator who works with family law cases can analyze the company’s financials, the terms of the cap table, the liquidation preferences of the preferred series, and comparable private market transactions to arrive at a defensible range of values for the common stock.
Competing valuations from qualified experts are normal in high-stakes pre-IPO divorce cases, and a court-appointed neutral expert is sometimes the most efficient path to resolution. Any settlement that assigns significant value to pre-IPO equity without accounting for the real possibility of failure, a distressed exit, or a below-expectation IPO may not serve either party well in the long run. Ensuring that the non-executive spouse retains enough liquid assets to maintain financial stability regardless of what happens to the startup is a basic protection that should be part of every pre-IPO equity settlement.