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I've witnessed a couple cases where a startup founder's spouse divorced them and it nearly destroyed the company. Having a hostile party who doesn't care about

I've witnessed a couple cases where a startup founder's spouse divorced them and it nearly destroyed the company. Having a hostile party who doesn't care about the startup suddenly become a major shareholder is a recipe for unpleasantness. The blast radius and destruction of value of treating a startup as community property affects many people not in the marriage.

nostrademons 7y ago
I've also seen startups destroyed by a founder divorce, but a pre-nup wouldn't/didn't help. The problem (in all 3 cases) was that the founder's concentration, drive, motivation, and confidence was destroyed. Divorce is hugely emotionally tumultuous: people going through it usually do not have the mental bandwidth to spend on something as attention-demanding as a startup. It also usually leads to big changes in lifestyle, goals, and motivations: many folks I know who have gotten divorced completely reexamine what's important in their life. (In some cases, this leads to the divorce rather than the other way around.) Very often a startup, or the specific startup they're working on, isn't one of those things once the dust settles. The lesson I took from it wasn't to get a pre-nup, it was to invest time in your relationship even while doing the startup, and get your spouse on-board with it. That's somewhat incompatible with the Silicon Valley image of a maniacal laser-focused startup founder, but then, a large number of them have a wreckage of a personal life that ultimately ends up costing them a lot of what they've made in startups.
- jandrewrogers 7y ago
  All very good points.
- mikeg8 7y ago
  I agree but think that 1) there are many ways a founder can lose drive, motivation, concentration, etc. some being the death of a friend/sibling/parent, medical diagnoses etc. While a divorce may be very difficult for a founder to recover from, and avoiding divorce should be prioritized, it’s not a full-proof way to safeguard a founders productivity. 2) Without a pre-nup, the startup will most likely increase it’s exposure possibly adding a toxic shareholder/board member, a situation that may be more difficult to recover from than replacing the founder. Just my thoughts.
im3w1l 7y ago
Could you give them non-voting shares or something? Seems fairer than giving nothing.
- jandrewrogers 7y ago
  Even if the shares are non-voting, converting half the founder's shares into dead equity in the cap table creates problems for the other investors. It isn't only about voting rights. For example, they may need to top off the founder's equity to maintain an acceptable level. This either requires unplanned dilution for no additional benefit to the company or reallocating equity from somewhere else. Basically, other people with an active interest in the company may have to eat a loss due to the conversion of founder stock to dead equity, it isn't just the founder that loses. Investors avoid cap tables with a lot of dead equity in any case, so it will also make it harder to raise money in the future.

nostrademons 7y ago

I've also seen startups destroyed by a founder divorce, but a pre-nup wouldn't/didn't help. The problem (in all 3 cases) was that the founder's concentration, drive, motivation, and confidence was destroyed. Divorce is hugely emotionally tumultuous: people going through it usually do not have the mental bandwidth to spend on something as attention-demanding as a startup. It also usually leads to big changes in lifestyle, goals, and motivations: many folks I know who have gotten divorced completely reexamine what's important in their life. (In some cases, this leads to the divorce rather than the other way around.) Very often a startup, or the specific startup they're working on, isn't one of those things once the dust settles. The lesson I took from it wasn't to get a pre-nup, it was to invest time in your relationship even while doing the startup, and get your spouse on-board with it. That's somewhat incompatible with the Silicon Valley image of a maniacal laser-focused startup founder, but then, a large number of them have a wreckage of a personal life that ultimately ends up costing them a lot of what they've made in startups.

jandrewrogers 7y ago
All very good points.
mikeg8 7y ago
I agree but think that 1) there are many ways a founder can lose drive, motivation, concentration, etc. some being the death of a friend/sibling/parent, medical diagnoses etc. While a divorce may be very difficult for a founder to recover from, and avoiding divorce should be prioritized, it’s not a full-proof way to safeguard a founders productivity. 2) Without a pre-nup, the startup will most likely increase it’s exposure possibly adding a toxic shareholder/board member, a situation that may be more difficult to recover from than replacing the founder. Just my thoughts.

im3w1l 7y ago

Could you give them non-voting shares or something? Seems fairer than giving nothing.

jandrewrogers 7y ago
Even if the shares are non-voting, converting half the founder's shares into dead equity in the cap table creates problems for the other investors. It isn't only about voting rights. For example, they may need to top off the founder's equity to maintain an acceptable level. This either requires unplanned dilution for no additional benefit to the company or reallocating equity from somewhere else. Basically, other people with an active interest in the company may have to eat a loss due to the conversion of founder stock to dead equity, it isn't just the founder that loses. Investors avoid cap tables with a lot of dead equity in any case, so it will also make it harder to raise money in the future.