Loading...
Answers
MenuHow to avoid financial impact of separation/divorce on startup?
I founded a startup(solely owned) after my marriage and am in process of cofounding another one with a friend of mine. I am in middle of a possible separation or divorce with my spouse. It definitely drains you and impacts abilities to focus on startup. Is it possible to avoid my spouse claim any share on the startup? Can it impact the new startup I am planning to co-found soon?
Answers
Depending on your individual circumstances, your spouse may be entitled to as much as 50 percent of your business in a divorce. Since it is probably safe to assume that you will not want your ex-spouse to remain in your life as a business partner, what can you do to protect your business?
Although there are differences from state to state, in general, separate property includes:
a. Property that was owned prior to the marriage
b. An inheritance received by one spouse solely
c. A gift received by one spouse solely from a third party (not from the other spouse)
d. The pain and suffering portion of a personal injury judgment
Separate property can lose its that status if it is mixed or commingled with marital property or vice versa. For example, if you re-title your separately owned condo by adding your spouse as a co-owner or if you deposit the inheritance from your parents into a joint bank account with your spouse, then that property will most likely now be considered marital property. All other property that is acquired during the marriage is considered marital property regardless of which spouse owns the property or how it is titled. Marital property consists of all income and assets acquired by either spouse during the marriage including, but not limited to: Pension plans; 401(k)s, IRAs and other retirement plans; deferred compensation; stock options; restricted stocks and other equity; bonuses; commissions; country club memberships; annuities; life insurance (especially those with cash values); brokerage accounts – mutual funds, stocks, bonds, etc; bank accounts – checking, savings, CDs, etc; closely-held businesses; professional practices and licenses; real estate; limited partnerships; cars, boats, etc; art, antiques; tax refunds.
In many jurisdictions, if your separately owned property increases in value during the marriage, that increase is also considered marital property. It is also especially important for you to know if you reside in a Community Property State or an Equitable Division State. There are nine Community Property States: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. These states consider both spouses as equal owners of all marital property (a 50-50 split is the rule). The remaining 41 states are Equitable-Distribution States, which consider factors such as the length of marriage and the spouse's earning power and involvement in building the business when determining a settlement. Settlements in Equitable Distribution States do not need to be equal, but they should be fair (equitable). You should fully understand this especially important distinction between separate and marital property so that you do not inadvertently do anything that might cause your separate property to be construed as marital property.
So, what is a prenuptial agreement? A prenuptial agreement (prenup) is a contract signed by both parties before their wedding that details what their property rights and expectations (including alimony) would be upon divorce. A well-drafted prenup can 'override' both Community Property and Equitable Distribution State laws and the courts will usually respect such agreements, making them an immensely powerful tool in protecting your business.
Having said that, prenups can be rather tricky, so it is important that they are well drafted. To strengthen them, each to-be spouse should be represented by their own attorney. In most jurisdictions prenups should contain the following vital elements:
1) The agreement must be in writing (No oral prenups)
2) It must be executed voluntarily and without coercion (having your fiancé sign a prenup the day before the wedding is a good way to invalidate that prenup)
3) There must be full disclosure (no hiding of assets) - this is another way to invalidate a prenup
4) The agreement cannot be unconscionable (this is also another way to invalidate a prenup). For example, if you are making millions, do not expect to get away with only giving up the silverware in the divorce, even if that's what's in the prenup.
5) It must be executed by both parties, preferably in front of witnesses (or a notary)
Some attorneys even recommend having a judge witness the signing to make sure that no party was coerced. By using a prenuptial agreement, the parties can decide in advanced what property will be considered separate property and what property will be considered marital property and how that marital property should be divided. A prenup is probably one of the best and least expensive ways of protecting your business against a future divorce. But if you do not get a prenup put in place, a postnuptial agreement may be an option. It is like a prenuptial agreement except that it is, as the name implies, entered, and signed after marriage. To be valid, a postnups should contain the same vital elements as a prenup. Having said that, several states still do not recognize postnups and even when they do, postnups are challenged and invalidated much more frequently than prenups.
Before marriage, the parties are entering into an agreement much like two businesspeople entering a contract and neither party has any legal family law rights on the other. Theoretically, if they do not like the contract, either party can walk away. However, after marriage, the situation is quite different. The married couple now have very well-defined legal rights regarding support and property division, and they are in a fiduciary relationship with each other, meaning each party has to act in the best interests of the other party. Therefore, any transactions between them will be viewed with caution by the courts. By negotiating a postnuptial agreement, one party will typically be giving up some of these rights and that's why postnups will usually be held to a higher standard of fairness than prenups (on the theory that individuals have less bargaining power once married). Nevertheless, if you do not have a prenup, try to get a postnup. It is better than nothing. Just understand that a postnup is not nearly as ironclad as a prenup and you never know how the courts will act if one spouse decides not to abide by the terms of the postnup.
Partnership, shareholder and/or operating agreements should include various provisions that would protect the interests of the other owners if one of the owners gets divorced, including:
a. A requirement that unmarried shareholders provide the company with a prenup agreement prior to marriage along with a waiver by the owner's spouse-to-be of his or her future interest in the business.
b. A prohibition against the transfer of shares without the approval of the other partners or shareholders and the right, but not the obligation, of the partners or shareholders to purchase the shares or interest of one or both of the divorcing parties so that the other owners can maintain their control of the business.
This point is often overlooked. If you don't pay yourself a competitive salary and instead reinvest everything back into the business, your soon to be ex-spouse might claim that he or she is entitled to more money or a larger percentage of your business because he or she did not derive any benefit and all your money went back into the business instead of the household. If your spouse was employed by you or your company, helped run the company in any way or even contributed business ideas during your marriage, then he or she may be entitled to a substantial percentage of your business. The more involved in your business your spouse was, the bigger that percentage would be. If you have partners in your business, then your spouse would own a percentage of your share.
If for whatever reason you were not able to adequately protect your business and now your spouse is entitled to an ownership interest, here are some ways to pay him or her off (I'm assuming you don't want to be business partners after the divorce):
a. Use your share of other marital assets including cash, stocks, real estate, retirement funds, etc.
b. Property Settlement Note – this is a long-term payout (with interest) of the amount you owe your ex-spouse for the value of her share of the business.
c. Sell the business and divide the sales price. This is obviously the least preferred method, but all too common. When the business represents many of all assets, there just may be no other way to pay-off the other spouse.
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath
Related Questions
-
If a US-based individual has worked for a Canadian co as a "partner" for years (but never signed an agreement), who retains rights for work completed?
Before litigating on one another, why don't you instruct your respective legal counsel not to sue, but rather to MEDIATE and come up with a FAIR solution for both parties based on: hard dollars invested, sweat equity and ideas. And before you even spend your after-tax dollars as an entrepreneur to do that, ask yourself: how much money did this business generate so far? If the answer is 0$ you may want to reconsider implicating your lawyers. Maybe you are chasing a FBI (false beautiful idea), but nonetheless you may think you have invested so much time, effort, money and emotions in the project so you don't want to let go. That's ok, but pick a fight that has a REAL prize to win, not some maybe-vague-possible revenue stream, otherwise the only winners will be your lawyers....Litigation: you know when it starts, but never when it will end...FB
-
Getting ready to set up the LLC for my software startup. Any recommendations? I live in CA but looking at basing it out of Arizona or Delaware. Thx!
For software startups it's more common to use a Delaware corporation. It gives you more flexibility when adding cofounders or giving out stock to early employees ( something you'll have to do to attract the best ). If you are seeking outside investment, you'll end up doing a DE C-corp prior to getting any money, so why not just do it from the get go? You'll need a foreign corporation in the state you're located and possibly pay franchise tax to both DE ( $450 / year ) and your state ( CA is $800 / year ). Then maintain a register agent in DE ( $100 / year ). So you save some money with an LLC but I think that structure is not suited for a modern software company.DA
-
What is the average cost to close a round of seed funding?
I'm reluctant to say "it depends," but legal expense for a true seed round varies dramatically based on: 1. Whether the investment is structured as a priced equity round vs. convertible debt (or variations on that theme such as "SAFE") 2. Number and location of investors, timing of closing(s), and prior angel investing experience 3. Company counsel's efficiency and fluency in industry norms 4. "Deferred maintenance" necessary in areas like corporate formation, founders' equity issuance and IP assignments. #4 is the item that takes many entrepreneurs by surprise. On the investor side, it leads otherwise very savvy observers to give unrealistically low estimates of legal expense because they assume starting from a clean slate. This item is also most resistant to automation or standardization because startups come into being many different ways; each story is unique. I would put the lowest estimate at around $3K, assuming the company is already formed as a Delaware corporation with clean, basic documents, has issued founders' stock and handled related IP and other matters, and simply needs to issue a convertible note to one or two accredited investors with minimal negotiation of documents. The highest I would expect for a true "seed round" is about $15K, where some corporate cleanup is needed, the deal is structured as a streamlined kind of preferred equity (e.g., Series Seed), there are multiple closings with investors on different dates and terms, etc. Beyond that point we're really in "Series A" territory, doing things like creating a full set of VC preferred stock investment documents (about 100 pages), negotiating with investors' counsel (at the company's expense), and so forth. The expense and complexity of a traditional Series A deal have been the main impetus behind using convertible debt or Series Seed-type documents for seed-stage investments of less than $1 million or so in recent years. I hope this proves helpful. Always happy to chat and answer further questions.AJ
-
Can a patent that contain well known techniques published in books and has been in the public domain 1 year before filing the patent be approved?
I am assuming you are in the US? I'll assume you are. The fact that the patent has been approved proves that in the it can be, its a precedent and US law is precedent bound. As for lawyers, no you'll have to pay for your own lawyers.SK
-
Trying to understand what we are responsible for tax wise and legally...
One would need to review the sale agreement to provide you with any sound advice. If properly drafted in first place (ie protecting your right to future payments) then there should be some contractual tools available for you in the agreement.GS
the startups.com platform
Copyright © 2025 Startups.com. All rights reserved.