(Almost) Jeff Bezos
Let's cut to the chase and address the elephant in the room. After a quick reality check, none of us are Jeff Bezos, the founder of Amazon. This article is probably being read at a coffee house, an open space (the Israeli equivalent of the US home garage where Paige and Bryn founded Google), on a ride to the University, or even in bed. However, it is not unlikely that one, or perhaps even a few of you, will be involved in or at the forefront of the next exit; and given the chance of that happening, this article is for you.
When a founder of a company is getting divorced, the process may impact the company and its shareholders in several respects: causing a change of corporate control, paralyzing the board, creating exclusion of potential investors during the divorce period characterized by business uncertainty and fear of being dragged into the family conflict, etc.
In the case of Bezos, the divorce had little effect other than the media frenzy around it. Although according to Washington state law, in the absence of a prenuptial agreement, McKenzie, Bezos' wife was entitled to half of Bezos's shares in Amazon, Bezos held only 16% of Amazon's shares, which were devoid of voting rights, and therefore the effect on the company itself was minimal.
But what happens when a founder holds half of the company's shares (Mark Zuckerberg in Facebook being an extreme example)? Or in the case where the founders, who hold a certain percentage of the company, have a joint right to appoint a director? In these situations, the impact on the company would be dramatic if not destructive.
In Israel, unless the couple has agreed otherwise in a prenup, each spouse is entitled to half of all the couple's assets as of the date of marriage, except, among other things, assets that each spouse had before the marriage or received as a gift or inheritance during the marriage.
This seems like a rather optimistic outlook – if one spouse is a founder of a startup before the marriage, in the event of a divorce, the other spouse is not entitled to half the value of their shares in the company, which might have already been liquidated in an exit by that time. Furthermore, the law speaks of entitlement to half the value of the asset and not half of the asset itself, and in our case - half the value of the founder's shares and not half the shares themselves.
However, reality is never as clean cut as the law proposes; for example, consider a founder who invested all her energy and finances in a start-up for a decade, but the business didn't take off during those hard-working years. Then, a year into her marriage, investors come along and invested in the company, round after round until, during the third year of her marriage, the company was sold for $ 70 million. Can her spouse then claim to be entitled to half of her stake in the company just because the exit occurred during the marriage?
What happens in the event where the founder's spouse made an indirect but significant contribution to the founder during the development of the company, a contribution that constitutes real participation in the Company? Does this contribution mean the spouse can claim they share the founder's shares in the company by virtue of the Common Law?
What about in the event where one of the Founders passes away? It is doubtful that the Founders thought ahead and theorized that they might one day awaken to a reality where a founder's spouse and children are involved in the daily management of the company and make significant business decisions. Unfortunately, having represented thousands of companies over the years, this is a situation our firm has had to deal with more than once or twice.
This is not an attempt to preach avoiding relationships until after an exit (even in that case, many questions may arise). However, it is certainly advisable to take precautionary steps at the founding stage - both at the company level (implementing required mechanisms in the incorporation documents and Founders' agreements) and at the familial level (a prenup, a will, ongoing power of attorney), because the financial cost of dealing with these issues today, through editing documents and getting the startup going, is nothing compared to the emotional and financial price in the future.
Stay tuned for next time: "Preparing for an Exit? – Prenupts"
Guy Sagiv is a partner in the Family Wealth Management. Guy has extensive experience in advising families and family businesses, constructing corporate and long term family arrangements and assisting clients through the transition of the family business to the next generations.
Guy provides advice to private clients on different aspects of family wealth management and planning. This includes preparation of matrimonial agreements; family trusts and wills and probate and assets management services. Guy is also authorized by the Administrator General at the Ministry of Justice to prepare and execute Ongoing Power of Attorneys (“Living Wills”).
Guy advises foreign banks and trust companies in matters related to his field of practice.
Guy also provides New Immigrants (‘Olim Chadashim’) and Expats on Aliyah benefits, visas, immigration and naturalization.