In the world of startups, the compensation and benefit structure is more unique as compared to other professionals. The younger the startup, the greater likelihood that the base salary will be low but the deficit made up with stock options that will eventually vest, be exercised and sold by the tech professional. So, how is this compensation structure dealt with when it comes to establishing child support?
In 2018, the First District California Court of Appeal reversed the decision of the trial court and recognized that vested and matured stock options of a successful and wealthy tech executive in Northern California should be included in that parent’s gross income for purposes of child support, regardless of whether the parent elects to exercise the options and sell the stock. This decision, involving John and Patricia Macilwaine and their four children, is a significant California family law case when it comes to determining how and when stock options factor into a parent’s gross income, a key element in calculating child support under the California’s statewide uniform guideline formula.
In her appeal, Patricia contended that the trial court erred when it granted John’s request to modify an existing child support order on the basis that his earnings equated to an unnecessarily high child support number. In relevant part, Patricia argued that John’s stock options were “income” once they vested and the restrictions on John’s ability to sell the stock were removed. John, however, asserted he had no “income” until he chose to exercise his options and sold his stock.
The Court of Appeal agreed with Patricia. Here are some of the more salient points of the Court’s analysis which favored Patricia’s position:
- Stock options become “income” (the market price less the “strike price”) once the legal restrictions on the exercise and sale of the options are removed.
- Stock options which have vested, but are subject to other restrictions on sale should not be considered “income” for purposes of child support.
- A parent’s investment preferences to not exercise and sell stock options should not affect “income” available for support: child support is meant to provide for the immediate needs of the child, not to maximize returns on a long-term investment.
- The court must only look at a parent’s ability to pay child support, not their desire to pay child support.
As the structure of businesses change with the increase in tech startups in this state, income for child support is not just comprised of a parent’s salary. Skilled family law attorneys must assess a parent’s income from all sources and review not just that parent’s compensation structure, but the benefits structures too, to determine their client’s child support risks, challenges, and benefits.