Step one: Bright idea. Step two: Prenuptial agreement

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 fiance´, who already had his own small tech company, signed a prenup with clear terms, Mazzei says: “The spouse who has an idea [and] starts a business ‘owns’ that business. It’s their baby.”

A few years later, Mazzei was travelling through the San Francisco airport when she saw her former client on a magazine cover. Her startup 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.

Fortunately, a well-written prenup is a safeguard against post-divorce havoc, which is why more and more young couples are insisting on the agreements, say more than half-adozen lawyers in the Bay Area and elsewhere.

“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,” says Manhattan-based divorce lawyer Jacqueline Newman.

Today’s start-up founders have plenty of prenup-writing forebears to emulate. Google co-founder Sergey Brin and Anne Wojcicki, who helped found genomics company 23andMe, had a prenup when they married in 2007. After they divorced in 2015, his Google stake was unchanged.

Oracle’s Larry Ellison, whose net worth is US$59.8 billion ($94.8b) according to the Bloomberg Billionaires Index, has been married and divorced multiple times, but it never affected his stake in the software company.

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

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.

“We’re trying to make sure that people don’t become involuntary business partners with someone they don’t know, don’t like or who aren’t qualified,” says James Ficenec, a partner at Newmeyer & Dillion in Walnut Creek, California.

MacKenzie Bezos and Amazon.com founder Jeff Bezos divorced this year, leaving her with a 4 per cent stake and a net worth of US$34.6b according to the Bloomberg index. He kept 75 per cent of the couple’s Amazon shares, and retains voting control of those she does hold.

“One issue we come across very often is, ‘How do you value a startup?”’ Mazzei says. Years before an initial public offering, a start-up might have no profits or even revenue to speak of. A promising company could later go under — or eventually be worth billions.

Lawyers can usually sort out the legal ramifications of divorce. They’re less helpful in containing the chaos that a founder’s marital problems might create in the workplace or business relationships.

“We have companies where the founder is the brand, and trust and credibility are core to the business,” says Ed Zimmerman, partner and chair of the tech group at Lowenstein Sandler in New York. “If you are investing in a company because you think the founder is amazing,” it can be alarming to learn that he or she faces the distraction of an acrimonious divorce or custody battle, he says.

Then there’s sometimes other nasty fallout, of the sort that companies are increasingly sensitive to in the #metoo era.

“It would be great if we lived in a world where people who had marital problems didn’t manifest those problems by hitting on or dating people who worked at their company,” Zimmerman says.

“Those kinds of things tend to be more problematic than who gets the shares.”