A prenup is the latest must-have for tech start-up founders in love

THE young woman in Monica Mazzei's San Francisco law office was adamant: She wanted a prenuptial agreement.

Never mind that the client had barely anything to her name. What she had was a bunch of start-up ideas. She and her fiancé, who already had his own small tech company, signed a prenup with clear terms, Mazzei said: “The spouse who has an idea [and] starts a business ‘owns' that business. It's their baby.”

A few years later, Mazzei, a partner at Sideman Bancroft, was traveling through the San Francisco airport when she saw her former client on a magazine cover. Her start-up had struck gold. Her husband's business had fizzled.

In Silicon Valley, where penniless programmers fervently believe their ideas are worth billions, getting rich can take priority over getting married. California law assumes that any wealth created during a marriage is community property, which should be split equally in a divorce. That's alarming not just for young entrepreneurs but also their investors.

DIVORCE HAVOC

Fortunately, a well-written prenup is a safeguard against postdivorce havoc, which is why more and more young couples are insisting on the agreements, according to more than half-adozen lawyers in the Bay Area and elsewhere. Long popular with older wealthy couples who re-marry, prenups are also being demanded by entrepreneurs who want to keep future windfalls to themselves.

“I am seeing more and more young people want to enter into prenuptial agreements who do not currently have a lot of money now but plan to have a lot of money someday,” said Manhattanbased divorce attorney Jacqueline Newman.

In a 2016 survey by the American Academy of Matrimonial Lawyers, 3 in 5 divorce attorneys said more clients were seeking prenups in the past three years. About half said they'd seen a spike in the number of millennials requesting the agreements.

“People's concepts and notions of fairness when it comes to privately held businesses are changing,” said Mazzei, adding she's seen “a tremendous increase” in prenups in the past eight years. “They feel that even if they're married, this is their passion. The agreement should be reflective of that.”

'IT'S COMPLICATED'

Today's start-up founders have plenty of prenup-writing forebears to emulate. Google cofounder Sergey Brin and Anne Wojcicki, who helped found personal genomics company 23andMe, had a prenup when they married in 2007. After they divorced with little fanfare in 2015, his stake in Google remained unchanged.

“It's complicated — that's all I can say,” Wojcicki told Bloomberg TV about the split.

Oracle Corp.'s Larry Ellison has been married and divorced multiple times, but none affected his stake in the software company. Ellison is the seventh-richest person in the world with a net worth of $59.8 billion, according to the Bloomberg Billionaires Index.

Still, a prenup hardly guarantees a smooth divorce. Judges can and do throw out the agreements, especially if they're drafted poorly. “If you don't put in the right language, a lot of prenups don't do the job,” said Lowell Sucherman, a divorce attorney at Sucherman Insalaco in San Francisco.

In 2017, One Kings Lane cofounder Alison Gelb Pincus, wife of Zynga Inc. founder Mark Pincus, challenged their premarital agreement in court while the couple was getting a divorce, according to a court filing. It's unclear whether she prevailed as final terms of the divorce aren't public.

While venture capital firms don't explicitly require prenups, they do demand legal language protecting their investments in the event a divorce court hands a chunk of a founder's shares to an ex-spouse. So do other cofounders.

FOUNDERS' CONTROL “Founders have wanted to ensure that someone else can't suddenly come in and obtain some sort of founders' control,” said Par-Jorgen Parson, a partner at venture capital firm Northzone, who has served on the board of Spotify Technology SA. “It's just as often driven by the founders as by external investors. You don't want to rock the balance of power.”

Venture capital firms often demand that founders' husbands and wives sign “spousal consent” forms. Such agreements determine who gets to vote for board members, and how and when shares can be sold. In the event of a divorce settlement (or death or disability), a founders' spouse might end up with company shares. But, the agreements ensure that an ex can't exercise much, if any, control over the company postdivorce.