Equity compensation drives executive and tech-finance pay packages, and it is the single most frequently misclassified asset in New York matrimonial practice. Unvested RSUs, stock options, and deferred equity awarded during the marriage are usually marital property, in whole or in part, under DRL § 236(B)(1)(c). This article covers the DeJesus time-rule framework, the classification analysis for different award types, and the discovery and valuation posture that produces a defensible division.

The DeJesus Time-Rule Framework

The New York Court of Appeals addressed unvested stock options in DeJesus v. DeJesus, 90 N.Y.2d 643 (1997). The decision set a two-step analytic framework for equity compensation that remains the controlling New York authority. Step one classifies the award based on what service the grant compensates. Step two, if the award is partially marital, applies a coverture-fraction time rule to allocate the marital share.

The time rule is the DeJesus coverture fraction: the numerator is the time from the grant date to the end of the marriage; the denominator is the time from the grant date to the vesting date (or in some formulations the end of the service period the award compensates). The resulting fraction is the marital portion of the award. The remainder is separate property of the employee spouse.

DeJesus's framework applies to RSUs, non-qualified stock options, performance share units, and other equity grants whose vesting straddles the matrimonial action's commencement date. The framework does not automatically apply to cash bonuses, year-end cash incentive plans paid in the ordinary course, or to equity granted entirely after commencement, each of which is analyzed under a separate framework.

Classifying the Grant: Past, Present, or Future Service

The classification question is what the award compensates. Three categories matter.

First, awards granted during the marriage that compensate past or present service performed during the marriage. These are fully marital, subject only to the time-rule analysis if the award was not fully vested as of commencement. A retention bonus paid in RSUs for past loyalty, or a performance bonus paid in options for prior fiscal-year results, fits here.

Second, awards granted during the marriage that compensate future service (service extending past commencement). These are partially marital. The time rule allocates the pre-commencement portion as marital and the post-commencement portion as separate. Standard four-year vesting schedules for new-hire RSU grants are the classic example. The grant covers service through the vesting date, and the time rule divides it.

Third, awards granted after commencement. These are presumptively separate property under DRL § 236(B)(1)(d). The presumption can be rebutted where the award substitutes for compensation that would have been paid during the marriage, or where the award is a disguised deferred payment of a pre-commencement bonus, but the employee spouse typically starts with the separate-property position.

Vested vs. Unvested at Commencement: Each Carries a Different Analysis

A fully vested award at commencement is simpler. It is a marital asset (if granted during the marriage for past or current service) subject to equitable distribution at the then-current value. The valuation question is the fair-market-value of the award on the agreed valuation date, which may be commencement, trial, or an interim date.

An unvested award at commencement is more complex in three ways. The marital portion is a fraction, not the whole. The valuation is uncertain because the vesting is contingent on the employee's continued employment. And the award, if it vests post-commencement, will be received by the employee spouse at a point when it is characterized partly as marital property and partly as separate, a mixing problem that the agreement or decree must resolve on the record.

The common structural solutions are deferred-division orders (payor spouse delivers the marital portion in kind as each tranche vests), buyout structures (payor spouse pays the receiving spouse a lump sum based on a present-value calculation), or constructive-trust mechanisms where the payor holds the marital portion in trust pending vesting.

Stock Options and RSUs: Why the Mechanics Diverge

Stock options and RSUs are both equity compensation, but they divide differently.

RSUs become shares on vesting. The receiving spouse's marital portion, once vested, is a share of common stock subject to the employee's capital-gains basis from the vest date. Division is typically in kind. The shares are transferred to a brokerage account or a sale is executed and the proceeds remitted. The tax posture is relatively clean because the ordinary-income tax was paid by the employee at vest.

Stock options convert to shares only on exercise, and exercise requires the strike-price payment. Division is more complex because the receiving spouse holds a derivative right that may be in-the-money or out-of-the-money and expires on a date certain. Common structures include constructive-trust language under which the employee spouse exercises on the receiving spouse's instruction and the net proceeds are divided, cash-equivalent buyout under a Black-Scholes or binomial model, or deferred-division orders that specify exercise mechanics and tax allocation.

Incentive stock options (ISOs) add a layer: ISOs lose their favorable tax treatment if transferred, so direct in-kind division is usually unavailable. The practical answer is a constructive-trust structure or a buyout.

Discovery Specific to Equity Compensation

A proper DeJesus analysis cannot be done from Form W-2 and the employee's own characterization. The grant documents are the controlling evidence. In the discovery phase of a matrimonial action involving equity compensation, the demand list should include each of the following.

Grant agreements for every outstanding award, including the vesting schedule and the stated purpose of the grant (new-hire, retention, performance, promotion). Pay stubs and year-end summaries reflecting ordinary-income treatment on vesting events. Form 3921 and Form 3922 for stock-option grants and exercises. The employer's equity compensation plan document and any amendments. Fidelity, E*Trade, Schwab, Shareworks, or Carta account statements covering the full marital period, not just a snapshot. The employee's offer letter and any subsequent compensation review letters. Any 10b5-1 trading plan the employee has in effect.

A pattern worth watching: equity grants backdated to appear to compensate pre-commencement service when the award was in substance a retention or future-service grant, and the reverse, grants dated after commencement that in substance compensate pre-commencement work. The grant document is what controls the classification; counsel develops the record to characterize the award on its actual terms rather than the employee's characterization.

Valuation: Illiquid, Volatile, Tax-Trapped

Public-company RSUs and stock options are valued using observable market data. The fair-market-value of RSUs is the share price on the valuation date. Stock options are valued using Black-Scholes or a binomial model, inputting the strike price, time to expiration, implied volatility, dividend yield, and the risk-free rate. The valuation is sensitive to the volatility input and the expected term. Small changes produce large valuation swings.

Private-company equity is harder. Pre-IPO RSUs, early-stage stock options, and profits-interest grants in LLCs lack observable market prices. The valuation record is built from the company's 409A valuation, any recent secondary-market transactions, the most recent priced equity round, and comparable-company analysis. Where discovery produces conflicting valuation sources, the forensic accountant's opinion anchors the court record.

Tax treatment affects the net value of what is divided. Pre-tax value, after-tax value, and alternative-minimum-tax exposure (particularly for ISOs) each produce different equitable-distribution numbers. Agreements that specify a dollar value without specifying the tax posture frequently produce post-divorce disputes about who bore the tax burden.

A Representative Nassau/Queens Executive Compensation Matter

In a representative matter I handled on the defense side, the plaintiff spouse's W-2 reflected substantial RSU vesting income during the marriage, and the plaintiff sought the full value of all outstanding grants as marital property. Discovery produced the full grant history: approximately half the outstanding grants were awarded during the marriage for pre-commencement service (fully marital); the other half were awarded during the marriage but subject to four-year vesting schedules that extended well past commencement (marital only in part under DeJesus). The time-rule analysis cut the contested portion of the outstanding equity by a material percentage, and the resolved division allocated vested-at-commencement awards for buyout, applied DeJesus to the unvested tranches, and used a constructive-trust structure for the post-commencement vesting events.

Private-Company Equity: Pre-IPO, Secondary Transfers, Lockups

Equity in a pre-IPO company carries additional structural issues. Secondary transfers may be prohibited by the stockholder agreement or the company's bylaws. Lockup provisions may prohibit sale for a period after an IPO. Vesting may be subject to a performance condition that has not been achieved and may never be. ISO status is lost on transfer. The receiving spouse's remedy for a prohibited-transfer right is typically a constructive-trust order or a dollar-value buyout, not an in-kind division.

For profits interests in LLCs and S corporations, the analysis moves into partnership and S-corp tax law and the operating or shareholder agreement's buy-sell provisions. The equitable-distribution outcome frequently depends on whether the operating agreement contemplates a transfer to a divorcing spouse (most do not) and on the fallback remedy specified in the operating agreement for an attempted transfer.

Common Settlement Structures

Three structures recur in equity-compensation settlements.

First, deferred division. The agreement specifies the marital portion of each outstanding grant, the vesting schedule, and the mechanism for transferring the receiving spouse's share as each tranche vests. The employee spouse holds the award in constructive trust for the marital portion. The structure is clean on taxes (each party pays on their own share at vest) but requires continued engagement between the parties for the vesting period.

Second, present-value buyout. The parties agree on a present-value calculation (often using Black-Scholes for options, discounted present value for RSUs with a volatility adjustment for pre-IPO shares), and the employee spouse pays the receiving spouse's share in cash or other marital assets. The structure resolves the matter at agreement and avoids post-divorce coordination, at the cost of valuation risk; the actual value may be materially higher or lower than the present value.

Third, hybrid structures. Vested-at-agreement awards are bought out at observable fair-market-value; unvested awards are divided on a deferred basis under DeJesus. Hybrids are common in HNW matters because they match the agreement structure to the character of each tranche.

FAQ

If my spouse's RSUs vest after I file for divorce, are they still marital property?

Partially. Under DeJesus, the marital portion is calculated using a coverture fraction: time from grant to commencement over time from grant to vesting. The pre-commencement portion is marital; the post-commencement portion is separate property of the employee spouse. The classification does not turn on when the shares actually vest, but on when the grant was made and what service it compensates.

What happens if the stock price crashes between the agreement and the vesting date?

In a deferred-division structure, both parties share the market risk; each receives their share of whatever the vested award is worth at the time of division. In a present-value buyout, the receiving spouse has already been paid out at the agreed value and bears no further market risk; the employee spouse bears all post-agreement upside and downside. The structure the parties choose at settlement locks in that risk allocation.

Can my spouse hide RSU or option grants from me during a divorce?

Grant documents and vesting events are documented in multiple places: the employer's stock plan administrator (Fidelity, Schwab, E*Trade, Shareworks, Carta), the employee's pay records, year-end tax forms, and the employer's HR system. A properly scoped discovery demand captures the full grant history. Where a spouse understates or omits equity compensation, imputation under DRL § 236(B)(6)(b)(5) and the deception itself become factors in the equitable-distribution analysis.

Does the DeJesus framework apply to deferred compensation plans, not just equity?

The DeJesus time-rule framework applies broadly to future-service deferred compensation, not only to stock options. Non-qualified deferred compensation plans, long-term incentive plans, and cash-settled phantom-equity awards that vest over time are analyzed on the same two-step framework: classify what the award compensates, then apply the coverture fraction. Qualified retirement plans (401(k), pension) are divided under separate QDRO mechanics, not under DeJesus.

Working With Counsel on Equity Compensation

RSU, stock-option, and unvested-equity division is a technical area of New York matrimonial practice where the controlling framework was set by the Court of Appeals and the facts are built from grant documents, not from the employee's own characterization. If you are facing a high-net-worth divorce involving executive compensation, equity grants, or deferred compensation, contact Michel Law at (516) 440-3440 or schedule online.