For many families in the Seattle area, equity compensation is one of the largest assets in the marriage — and one of the hardest to divide. Grants are made years before they vest, their value moves with the stock price, and many cannot be transferred to a spouse at all.
This guide explains the main issues in plain language. It is general information, not legal or tax advice; your attorney and tax adviser should review any agreement involving equity compensation.
The common types of equity compensation
| Type | What it is | Divorce issues to watch |
|---|---|---|
| RSUs | Shares delivered as they vest, taxed as ordinary income at vesting | Unvested units cannot usually be transferred; tax is withheld at vest |
| Non-qualified stock options (NQSOs) | Right to buy shares at a fixed price | Value depends on future price; who pays the tax on exercise |
| Incentive stock options (ISOs) | Options with potential tax advantages | Transfer can cause loss of favorable tax treatment |
| ESPP shares | Shares bought at a discount through payroll | Holding periods; current offering-period contributions |
| Restricted stock / startup equity | Shares subject to vesting, often in a private company | Valuation without a public market; transfer restrictions |
| Deferred compensation | Pay earned now, paid in future years | Plan rules may limit division; timing of payment and tax |
Vested vs. unvested — and community vs. separate
Vested shares already held in a brokerage account are relatively simple: they can be valued and divided like any other investment, with attention to cost basis and embedded tax.
Unvested awards are harder. A grant may have been made during the marriage but vest after separation, or made before separation partly as a reward for future work. In Washington, the question is generally what the award compensates — past, present, or future employment — and courts have used time-based ("time rule") allocations to separate the community portion from the portion earned after separation. Different grants can be treated differently, so each should be analyzed on its own terms.
Practical ways to divide equity
- Offset: the employee spouse keeps the equity, and the other spouse receives other assets of equivalent after-tax value. Simple, but it requires agreeing on a value for something uncertain.
- Deferred distribution ("as-if-vested"): the employee spouse holds the community share for the other spouse and delivers shares or after-tax proceeds as each tranche vests. This shares the risk and reward of the stock price fairly, but requires ongoing cooperation and clear written mechanics.
- Hybrid: offset the vested shares now and share future vesting under a formula.
Whichever approach you choose, the agreement should spell out the grant-by-grant schedule, the allocation formula, how taxes and withholding are handled, what happens if employment ends or the company is acquired, and how information will be shared.
Tax considerations
Transfers between spouses incident to divorce are generally not taxable events under federal law, but equity compensation has its own rules. RSU income is usually taxed to the employee at vesting even if part belongs to the other spouse; non-qualified options transferred in a divorce may be taxed to the receiving spouse when exercised; and transferring incentive stock options can cause them to lose their favorable treatment. Washington's capital gains tax may also be relevant for larger sales. These are exactly the issues to confirm with a tax professional before an agreement is signed.
Why mediation suits equity compensation
Courts can only choose among the options presented to them. In mediation, you can design a structure around your actual grants — including how to handle a future acquisition, a departure from the company, or a decline in share price. With twenty years in the software industry, Joti Basi is familiar with how these plans work in practice. More on high-asset divorce mediation.
This page is general information, not legal, tax, or financial advice. Crossroads Neutral, LLC is not a law firm. Laws change and every situation is different — please consult a licensed attorney about your rights and obligations.
