Divorce and startups – what you need to know

Should you protect your startup with a pre-nup?

When you’re starting up a business, amongst the many things you need to think about are events that could happen in the future, including divorce.

During the divorce process, your business will be factored in as part of the financial resources available to you both and thus to the court for distribution. So whilst your business may be worth nothing now, if it becomes a roaring success, you might be in danger of losing out, big time.

If you are not yet married but are soon to be or decide to marry in the future, you should consider a pre-nuptial agreement, or pre-nup for short. This will go a long way to protecting your business and your investment in it.

Why do people still shy away from pre-nups?

Pre-nups are fairly standard now, but they still carry a slight taint from the big – usually celebrity – cases that have been splashed across the media over the years.

Some people think they are unromantic, that they question the validity of the marriage, and the parties commitment at an early stage. But in fact, stepping back and being objective shows they are a practical tool that can ensure future security for both partners. Because it works both ways and a judge will want to see that assets are divided fairly.

What needs to be considered when putting a pre-nup in place?

A pre-nup needs to be entered into by both parties ‘freely and knowingly’. Basically this means you must both understand the agreement fully and agree to it voluntarily.

You will need to seek independent, specialist legal advice. It is important to have separate advice in order that transaction is at arm’s length. It’s important to get everything done and dusted at least 21 days before you get married, otherwise there is less likelihood of your agreement being upheld.

Can you still protect your business if you’re already married?

A post nuptial agreement is becoming fairly common. It works in the same way as a pre-nup but is put into place after the marriage.

What about updating a pre-nup?

You can legally amend a pre-nup during the marriage. If you do, the pre-nup simply becomes a post-nup. Some couples do this if financial circumstances change, such as the original breadwinner of the household no longer being the highest earner or if one of you receives a large inheritance. Equally, if your start up business really takes off, you could in theory alter the split. However, bear in mind the need for the fair division of assets.

Both parties must agree to any modifications, and both parties must sign the new agreement.

Are such agreements legally binding?

Pre-nups or post-nups drafted correctly are legally binding but there are some caveats. UK courts do recognise both agreements but they can veto parts of the prenup if they feel these were forced upon partners who felt they were unable to say no at the time of drafting, who signed under coercion or when in poor mental health. They can also be contested if, for example, full disclosure of debts and finances was not adhered to, the signatures were faked, or changes made to the text after signing.

It is useful to keep a copy of the agreement to refer to if needed. Your lawyer will also keep a copy on file.

How to find the right lawyer

Your pre or post-nup agreement needs to be watertight, as do any updates. Business assets can become increasingly complex as your business grows. So you need a lawyer who is experienced in this area. Talk to business associates who may well have relevant contacts, or make sure that a lawyer you approach has the right credentials. I’d suggest using a family law firm known for a non-combative approach, as this should never be a confrontational process.

Think positive

Once your pre or post-nup agreement is drawn up and you and your partner are both happy with it, the hope is that you will never have to think about it again.

The information in this article is also relevant to civil partnerships, when agreements are termed pre-cips or post-cips.