Prenuptial Agreements and Community Property in California: What Equity Compensation Changes

California's default rules split marital earnings down the middle, and stock options and RSUs earned across a wedding date can be surprisingly hard to classify. Here is why many tech professionals ask about prenups, and what the law requires of them.

Few topics are less romantic than a prenuptial agreement, and few are more relevant to a household where one or both partners hold significant equity. This article describes general concepts only. Prenuptial agreements are legal documents governed by California family law, and anyone considering one should work with a licensed family law attorney; an investment adviser does not draft or interpret them.

California's default: community property

California is a community property state. In general, earnings and property acquired by either spouse during the marriage belong to both equally, while property owned before the marriage, and gifts or inheritances received by one spouse, remain that person's separate property, as summarized in the California courts' self-help guide. At divorce, a judge will typically confirm separate property to its owner and divide community property equally unless the spouses agree otherwise. The same guide notes that the date of separation marks the end of the community.

For most assets these rules are easy to apply. Equity compensation is harder, because a single grant may be awarded before marriage, vest during it, and be sold afterward.

Why equity is the hard case

Consider an engineer who receives a four-year RSU grant a year before getting married. Which portion is separate and which is community? California courts have generally treated unvested equity as earned over the vesting period and apportioned it by time, using formulas that divide the months of employment or grant time during marriage by the total months to vesting. A Bay Area family law firm's overview of how RSUs and options are divided describes the two common formulas, sometimes called the Hug and Nelson rules, and notes that unvested shares earned during marriage are community property even though they have not yet vested.

Founders face additional complications. Shares purchased for pennies before a marriage may be separate, but the labor a founder contributes during the marriage that makes those shares valuable can create a community claim on part of the growth. Refresh grants, secondary sales, and reinvested proceeds raise similar tracing questions that can require forensic accounting years later.

What a prenuptial agreement can address

A premarital agreement can define in advance how equity granted before, during, or after the marriage will be characterized, how proceeds from a liquidity event will be treated, and whether income from separate property stays separate. It can also address a home purchased with one partner's pre-marriage RSU proceeds, which is a common Bay Area scenario given median prices near $2 million in Santa Clara and San Mateo counties. Some couples use an agreement to create clarity rather than separation, for example agreeing that all equity compensation is community regardless of grant date.

There are limits on what an agreement can cover, particularly around child and spousal support, and an attorney can explain what is enforceable.

The procedural requirements are strict

California requires more than a signature for an agreement to be enforceable. Under Family Code section 1615, the party against whom enforcement is sought must have been represented by independent legal counsel or have expressly waived counsel in a separate writing after being advised to obtain it, and must have had at least seven calendar days between first receiving the final agreement and signing it. The agreement must not have been executed under duress, fraud, or undue influence, and a party who was not represented must have been fully informed in writing of the terms and their basic effect.

Full financial disclosure is the other pillar. Each partner's assets, debts, and income should be laid out, and equity grants should be documented with grant dates, vesting schedules, and any 83(b) elections. A financial planner or CPA can help assemble this information, but the drafting and negotiation belong to the attorneys.

Postnuptial agreements and practical steps

Couples who are already married can enter into a postnuptial agreement, which is generally subject to closer scrutiny. Useful preparation includes gathering equity plan documents, listing separate accounts, and deciding as a couple which outcomes matter most. Keeping separate property in separately titled accounts and avoiding commingling helps preserve its character even without an agreement.

The cost of an agreement is real, in legal fees and in the awkwardness of the conversation; the benefit is predictability. This article is educational only and does not constitute legal, tax, or investment advice; consult a licensed family law attorney and a qualified tax professional about your own circumstances.

Important Disclosures

Important Disclosures: Propulsion Capital Management is an investment adviser registered with the State of California Department of Financial Protection and Innovation. Registration does not imply a certain level of skill or training. This article is provided for general informational and educational purposes only and does not constitute investment, tax, legal, or accounting advice, nor an offer or solicitation to buy or sell any security or to adopt any particular investment strategy. The information is believed to be accurate as of the date of publication but is subject to change without notice; tax laws and regulations change frequently and their application depends on individual facts and circumstances. Nothing herein should be relied upon as a substitute for personalized advice from a qualified professional. Investing involves risk, including the possible loss of principal, and past performance is no guarantee of future results. Diversification does not ensure a profit or protect against loss. Any examples are hypothetical, are for illustrative purposes only, and do not reflect the experience of any client. Links to third-party websites are provided for convenience; Propulsion Capital Management does not endorse, and is not responsible for, the content of third-party sites. Propulsion Capital Management does not provide tax or legal advice; please consult your tax adviser or attorney regarding your specific situation.