Why Prenups are Important for Founders

While many are skeptical with prenuptial agreements' negative social stigma, prenups actually have more benefits to offer for couples, including founders.

In matters of love and commitment, discussions about prenuptial agreements have long been accompanied by a cloud of negativity and misconception. Often viewed as a cynical approach to marriage, prenups tend to have negative social stigma. While discussing and drafting a prenuptial agreement can indeed have emotional implications, it is important to recognize that the potential benefits and importance of a prenup often outweigh these temporary discomforts. A prenup can provide a sense of security and peace of mind for both individuals involved. It allows couples to protect their individual assets and establish a framework for addressing potential financial challenges in the future. 

Asset Protection 

When Jeff Bezos and his former wife, Mackenzie Scott, announced their divorce in early 2019 after 25 years of marriage, reports emerged that the couple did not have a prenuptial agreement in place, which then raised questions as to how their assets would be divided. While their divorce settlement ended amicably even without a prenup, Mackenzie could have sued Jeff for half of his assets. In Washington state, where the divorce was filed, divorce laws generally stipulate that marital assets are split equally. As a result, there was a possibility of a 50-50 division of the wealth accumulated throughout their marriage, including Jeff’s shares in Amazon.  

The Bezos divorce sparked discussions around the significance of prenuptial agreements, particularly for individuals with substantial wealth or business interests. It served as a reminder of the potential financial risks and uncertainties that can arise without a clear agreement in place, as the absence of a prenup can subject couples to the default laws of the jurisdiction in which they file the divorce. Prenups can cover various aspects of a couple’s financial matters and can be relevant during the course of the marriage as well.  

A prenup holds significant importance for founders entering into marriage as they often possess substantial personal assets, intellectual property, and potential future earnings tied to their business ventures. By specifying in the agreement that business assets are considered separate property, founders can ensure that their business and its assets remain protected from any claims or divisions in the event of divorce.  

Without a clear prenup, there is also a risk that founders may be obliged to liquidate their startup for their spouse’s entitlement to a portion of the company shares or to some of the share appreciation in the event of divorce. In Indonesia, if the founder started the company after their marriage, the partner is be entitled to half of the shareholding; if the founder started the company prior to their marriage, then the partner is entitled to half of the share appreciation.  

Depending on the company’s transfer restrictions and any negotiation between the couple and the company, the shares might be divided, sold with proceeds going towards a cash divorce settlement, or some other arrangement. The company may be powerless to prevent this but might be able to insist on additional transfer restrictions or other protections (waiver of information rights, proxying voting, etc.) as a condition for allowing a non-participating former spouse to hold stock. It all highly depends on the shareholders’ agreements and further negotiations, but a long, expensive legal battle is certainly waiting.  

Debt Allocation 

On the other hand, a prenup also serves as a backstop to debt collection. This is especially important for couples with one partner engulfed in massive debt. Debts you incur before the marriage are commonly referred to as premarital debt, whereas debt you incur afterwards are referred to as marital debt. While in the US, only marital debts are shared, in Indonesia, without a prenup in place, both premarital and marital debt incurred by your partner will also become your responsibility once you are married. With a prenup in place, you can specify which responsibilities are to be shared and which should be kept separate.  

Prenups allow founders to establish clear guidelines regarding the responsibility for debts. By outlining in the agreement that each spouse is solely responsible for their respective debts, founders can protect their business assets from potential claims by their spouse’s creditors, and their partners are also safe from any financial implications coming from third-party fundraising rounds done by the founders’ startups. This means that if one spouse encounters financial difficulties or incurs debts, the other spouse’s assets will remain safeguarded. As a founder, if your business requires funding from investors or banks, you may want to ensure that your spouse’s name is not associated with any potential legal or financial challenges that the company may face to ensure the well-being of the rest of your family.