What About Our Seed Funding? Asset Division in Divorce
Dividing assets pursuant to a divorce is challenging. Navigating the restructuring of your life, while simultaneously having to divide a business or business interests, and safeguard your business against potential fallout from the divorce can be particularly complicated.
For entrepreneurs and investors, one of the most overlooked – but critically important – questions in a divorce is: What happens to our seed funding? In high net worth divorces, the stakes are especially high. You are not just dividing a home or savings account – you may also be dividing ownership in a company, future equity, or early-stage investments that could be worth millions.
Understanding how and when seed funding was acquired, how equity is structured, and how future growth might impact a division of assets is key to protecting your financial future and investments.
What is Seed Funding, and Why Does It Matter in Divorce?
Seed funding is the money a startup raises in its earliest stages – before the business is generating revenue. It is the capital used to create a prototype, hire a small team, develop a product, test a market, or secure an office. Founders often receive this funding from angel investors, venture capital firms, or even friends and family. Determining whether an asset should be subject to division under the community property rules in a divorce will generally revolve around whether the asset was obtained as separate property prior to the marriage, or if it was gained during the course of the marriage. Generally speaking, anything gained during the course of the marriage will be considered equally owned by both married parties.
Again, generally speaking, what this means is that if one spouse founded the startup and received seed funding prior to the marriage, then the seed funding would likely be considered separate property and not subject to division.
Absent an outside agreement – such as a prenuptial agreement – seed money that was received during the course of the marriage will generally be considered marital property and subject to division. Consultation with legal and financial professionals provides insight into the startup’s value and its obligations regarding seed funding. This understanding is essential in coming to accurate determinations of what a founders’ share is in the startup – what is subject to division, and what that portion is worth.
Divorce Settlements and Seed Funding
California law has developed to help ensure that in the case of divorce, both parties will walk away with an even split of the marital estate. However, this does not mean that every asset must be split evenly. Couples who negotiate a settlement agreement outside of court have the flexibility to divide their estate on their own terms. A startup founder who prioritizes maintaining control and ownership of the company and funding might choose to exchange their interests in other estate assets in order to retain their interest in the business.
Contact Cardwell Steigerwald Young, LLP
Divorce can lead to uncertainty in life, and for many individuals it can even feel like a threat to your business and future interests. The experienced San Francisco high net worth divorce attorneys at Cardwell Steigerwald Young, LLP are ready to help provide the clarity and expertise you need to move forward. Contact our office today to begin discussing your own situation with our team.
Source:
selfhelp.courts.ca.gov/divorce/property-debts
