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Divorce Destroys Capital
- carlzlhu 16y agoTo be someone more precise in language, this article really make the point that divorce transfers capital from the unlucky couple to a pair of fortunate lawyers. Capital is not so much destroyed as transferred.
- cma 16y agoAs if the only thing that happens when you hire a lawyer is you pay them money. The "capital" that is destroyed is ultimately the lawyers' time and energy.
- Dylan16807 16y agoYeah, this isn't at all the article I was expecting because of that.
- barrkel 16y agoLawyers are a transaction cost of transfer of property in divorces. Even without direct destruction of the value of the property, the transaction cost hurts economic efficiency, see e.g. Coase theorem.
- barrkel 16y agoA business with the current input of one of its founders, motivated by a large share of ownership, is very probably a less valuable organization without that input. I would bet that the situation described in the article definitely amounted to destruction of wealth and wealth-generating capability.
- BobbyH 16y agoI think he does make the point that divorce does more than transfer capital from the unlucky couple to lawyers. There's also a value transfer from the unlucky couple to the person who provides liquidity by buying the couple's business for cheap. Using his example, the value of the couple pre-divorce was (roughly): (A) $1,000,000 in value for his share of his business, plus (B) $55,000 in cash. That's $1,055,000 in value, or $527,500 for each partner. After the divorce, the value of the couple is: (A) $250,000 in value for his share of the business (because of a quick sale of an illiquid business), plus (B) $0 in cash ($55k in cash to lawyers). That's a total of $250k, or $125k for each partner. The majority of the value transfer, then, goes to the buyer of the couple's illiquid business, which must be sold too-quickly. Or, to take a more charitable view of the buyer, the fall in value may be from the value destruction from one of the partners suddenly exiting the business.
- dennisgorelik 16y agoIt's only partially transfer of capital. Significant chunk of capital is destroyed: business does not function properly, because one of the owners is under duress, lawyers have to spend their time and efforts "transferring capital", ...
- prosa 16y agoMaybe what entrepreneurs need is a "Series AA"-style prenup to protect startup equity?
- spamizbad 16y agoPrenups don't fully hold up in court, and it's not uncommon for concessions to be made outside of the agreement.
- csallen 16y agoWhy don't prenups fully hold up in court, and what can be done to ensure you're protected?
- gscott 16y agoProtected from the one you love and want to spend the rest of your life with? The best protection is not marrying any person not totally committed to you and the 2nd best protection is not to be a jackass to the one you love. The 3rd best protection is a secret bank account in another country that she doesn't know about.
- philk 16y agoPeople change over time, and people are not always infallible judges of character. You have no way of guaranteeing that the person you marry is actually totally committed to you and you have no way of guaranteeing that that won't change over time. Seeking protection from unforeseen changes is a prudent thing to do.
- gscott 16y ago> Seeking protection from unforeseen changes is a prudent thing to do. Since it is unlikely that unless there is a huge benefit to signing a prenuptial agreement a woman isn't likely going to an alternative is to trick her by getting married in a state with laws that are beneficial to the income earner and not the spouse. You promise a nice wedding at a country club in xyz state, she thinks it is sooo romantic and that you are awsome. In reality when you dump her for a newer skinnier model she finds out that she has spent the last xx years with you for nothing because the state laws don't provide for an equal split of the assets. Out of kindness you buy her a used cheap RV so she isn't homeless and give her $200 so she can eat for a little bit while she signs up for welfare.
- oconnore 16y agoWhat is the possibility of simply socially informing your friends and family that you are "married" to your significant other, changing your last names to match, and signing a contract that you will support her/him for x number of years after any split? If you both love each other, there is no problem. If it does not work out, there is a monetary split as you defined in the contract, so no one is taken advantage of, and both people are secure for some amount of time until they can move on to a new job/new relationship etc. That way you don't have to waste 10 grand paying lawyers to setup a prenup so that you don't have to waste 50 grand paying lawyers to handle a divorce settlement.
- smokey_the_bear 16y agoYou'd miss out on a lot of marriage benefits with this strategy - jointly filing taxes, tax free inheritance to your spouse, hospital visitation rights, sharing your health insurance, and a lot more
- semanticist 16y agoUnder UK law, if you live together as a married couple, then you effectively legally are a married couple. 'Common-law' marriage. It only holds if you really do live like a married couple and people would reasonably assume you were married - but it would apply in this case. So this 'work around' would still get the benefits of being married - but also wouldn't avoid any divorce issues.
- barrkel 16y ago(Citation needed) - As I understand it, there is no such thing as common-law marriage in English law, and any reference to such is a reference to American common-law marriage. Cohabitation is different - part of means-tested benefits etc. - but it doesn't imply rights or obligations.
- julius_geezer 16y agoA few US states recognize common law marriage, or did within the last quarter century. South Carolina, I know is or was one--a mistress of William Hurt's offered the theory that they had been man and wife during the few weeks he was there for a movie.
- grandalf 16y agoSerious long term relationships are great. "Marriage" is a silly, bigoted custom that should just go away.
- The_Fox 16y agoSerious long term relationships are great, but without some kind of well-understood commitment like marriage there's nothing keeping two people together for life. When everything is going great in my marriage, I don't need a reminder that I'm obligated to stay with my wife. It's when things suck that my ring, my vows, and my marriage certificate are beneficial. They keep me there because I know that if I break them, I'd be a liar. And I know my wife will stick with me when things are tough because she's made the same commitment. If marriage is silly, are contracts between employers and employees and between founders and investors also silly? If not, why?
- barmstrong 16y agoSome differences between marriage and those contracts you mentioned... * they have performance requirements * they aren't life long commitments If you don't perform well as a CEO the board can fire you. And you don't get to keep half of their personal net worth either. You make a valid point that when things are tough, marriage helps you stay together. But it seems like for the wrong reason (fear of divorce, rather than love of the person). It also seems likely that if the other person know's it's difficult for you to leave, they may not try as hard. This same problem exists when professors get tenure, when you sign a 2 year contract with AT&T, or any long term contract that locks you in.
- The_Fox 16y agoYou're certainly right about the effects of being in a long-term relationship/contract. That's why things work much better when one has an attitude of, "I'm in this for the long haul- I better make an effort to straighten things out," rather than, "It's hard for my spouse to end this thing so I can slack off and be selfish."
- 16y ago
- jrockway 16y agoActually, litigation and selling illiquid assets destroy capital. The divorce angle of the article is just to add some outrage to an otherwise ordinary situation. Sell your business when nobody wants it, and you don't make much money. Sell your business when it's super-hot and awesome, you make a lot of money. It's called a "market".
- philk 16y agoTo be fair, divorce is the most likely reason the average person will have for winding up in expensive litigation and people are more likely to pursue it to the point of ruin because of the emotions involved. Also bear in mind the fact that husbands can frequently be held accountable for their spouse's legal fees and you have a situation which creates a perverse incentive for litigation to continue.
- jrockway 16y agoMy parents got divorced, and both had a bit of money and assets. They each hired a lawyer, split the assets, and that was that. I think people are basing their decisions with respect to marriage and divorce on what they hear on TV (or social drama sites), rather than actual data. Oh well, HN readers are people too... Also, the story this article is about would have ended the same way if he needed to sell the company to pay off some other arbitrary debt; margin call on a bad investment, the mortgage on his underwater home, anything. Divorce isn't relevant to the "life lesson". (Which is, "if you have to do something right now, you're not going to get a good price". I think I'll call it the "Best Buy" effect.)
- gscott 16y agoI agree with you, it is when people want to hurt each other that they end up with nothing, spending it all to keep the other side in court until they are broke or give up.
- MisterMerkin 16y agoDid you read the article? The reason he had to sell his portion of the business for a pittance was because the buyer knew he was desperate for cash which was caused by the divorce.
- mmaunder 16y agoInteresting that both this article and Elon Musk's piece recently (also on HN) suggest that lawyers encourage creating conflict to serve their own interests.
- jdietrich 16y agoMarriage is a lie. In America and much of Europe, just under half of marriages end in divorce. Any honest person would answer their vows with not "I do" but "probably". We like the idea of lifelong fidelity, but it simply isn't a practical reality for most people. We need to be honest with ourselves. We're all smart people here. None of us would be so stupid as to sign a really bad VC agreement because we really liked the VC. Why do so many of us willingly sign bad contracts in our personal life? If someone here was signing an agreement with a startup cofounder that had no stock vesting clause and no provisions to secure IP, we'd be in like a shot to warn them. If someone here announced their engagement, I'm sure we'd all congratulate them. Marriage is objectively a terrible financial deal, particularly for the likes of us, but we ignore how bad a deal it is for purely sentimental reasons.
- dotcoma 16y agoNot to mention: marriage is the number one cause of divorce ;)
- nostrademons 16y agoJust like birth is the number one cause of death. ;-)
- dotcoma 16y agoonly, you can choose not to get married :)
- ericd 16y agoThis is an entirely money-centric view of things. This is like saying going to a movie is a bad deal because you spent $15, 2 hours of time, and ended up with nothing financially useful at the end. Marriages are not usually primarily financial contracts, VC contracts primarily are. Money is an abstraction, a means to an end, not the end. For many (most?) people, that intended end is a happy, healthy, safe family, which is hard to do without marriage.
- 16y ago
- known 16y agoI guess http://en.wikipedia.org/wiki/Surrogacy http://en.wikipedia.org/wiki/Surrogacy is better than marriage.
- Tichy 16y agoCould he possibly have agreed to sell at a low price to spite his ex-wife?
- dennisgorelik 16y agoThe key mistake in that case was having strong negative emotions to each other. Divorce should be handled as a business deal with emotions being held under control.
- seertaak 16y agoOk, I get the argument that, on a personal level, divorce destroys your savings. But as far as capital goes, divorce destroys as much of it as marriage creates, namely none. And besides, when I get married, it will be forever ;)