PROBLEM:

Your debtor tells you that everything she earned while she was married is reflected in her tax returns, but you remember her asking your advice on whether she should accept stock options instead of a raise a few years back.  You can see from her tax returns that she did not get a raise that year, so you suspect she chose the stock options.

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SOLUTION:

Stock options can be tricky to find, since they are not usually registered with any government authority and, unlike bonds, they may not be reflected in the debtor’s tax returns.

Options are usually given to employees as part of a stock purchase plan or as an incentive.  There are two types of stock options: statutory and nonstatutory.  Most of the stock options that employers give to their employees are statutory stock options.

Employees who receive statutory stock options are not required to include those options as income in their tax returns.  However, they may be subject to the Alternative Minimum Tax when the debtor exercises the stock options.  If the debtor exercises the options and sells the stock, the income or loss from the sale will appear as a capital gain or loss on the debtor’s tax returns.

If you are not certain whether the debtor’s employer grants its employees stock options as a general policy, you can check the company’s SEC filings. The SEC requires public companies to disclose whether they give stock options to their employees and the total amount of those options.

If the debtor was a board member or officer with a public company, then SEC filings may, indeed, reveal the exact amount of options she received from her employer. If those options can be exercised immediately, then you can easily determine their value. Most of the value of an option lies in the difference between the option price and the current share price of the company.  If the company’s share price is far higher than the option price, then the options may be worth some serious money.

Options to purchase shares in a private company can be more difficult to find and to value.  Private companies do not have the same disclosure requirements as public companies and their share prices are not publicly available (see our recent post on valuing stock in private companies here) It is worth noting, however, that small, cash-poor private companies often compensate employees with options.  Even though their value can be difficult to ascertain, you should be sure to ask the debtor and her employer about any options he may own.  Who knows, that little tech startup your debtor works for may be the next Facebook.

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