As a founder, your shares and options are often your most valuable asset, and their protection would be high up on your priorities list were you ever to face getting divorced. This article will cover the types of considerations that are relevant to your business assets on divorce. These include the extent to which your shares or stock options are treated as “matrimonial”; how they may be valued; and what steps you may take now in order to protect your business interest.

Will my share in the business be included in the assets to be divided on divorce?

The likely answer is yes, unless your marriage was only very short.

Simply put, the starting point on divorce is a 50/50 division of matrimonial assets, unless one party’s financial needs require that they take a larger than 50% share. Needs is an elastic term but will essentially be their ability to meet their own housing needs and their day-to-day living costs, taking into account their income, mortgage capacity, and any other financial resources available to them.

A matrimonial asset is one that is the product of a party’s endeavours during the marriage, or the parties’ joint endeavours. This means that the following are generally not matrimonial: gifts, inheritances and assets that are owned before the marriage or acquired/ earned post-separation. Therefore the value of your interest in a business is matrimonial to the extent that value relates to the years that you were married. A marriage is deemed to start when a couple start cohabiting, provided your cohabitation period moved seamlessly into marriage.

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This means that if you founded your business before you started cohabiting with your spouse, the value of the business at the time you started cohabiting is non-matrimonial. Any growth in the value of the business during your marriage (including cohabitation) is matrimonial. If you founded your business when you were already married or cohabiting with your spouse, the entire value of your share in the business is matrimonial.

The reason why very short marriages are treated differently is because a spouse in that instance will likely not have a “sharing” claim, i.e. the starting point for their financial claim associated with your divorce is not a 50% share in matrimonial assets. It is instead limited to a “needs” claim. This means their claim will be limited to ensuring that they are put in a position where they will be able to independently meet their financial needs (including the needs of any children of the marriage) within a reasonable time period following divorce. They may need some financial assistance in the short-term to meet their needs. The hope would be that you can meet their needs claim using other financial resources without invading your business asset – for example by your spouse receiving a greater share in the family home.

Does this mean that my spouse obtains a stake in my business, or my business may have to be sold?

The aim is that this should not be necessary. For private businesses with few shareholders, the court will try to avoid either a transfer of shares to a spouse on divorce or a forced sale of the business.

The most common approach taken by the court is ‘off-setting’, whereby the non-shareholding spouse receives a greater share of the remainder of the matrimonial assets in lieu of the shares. Cash, other investments, the equity in the family home and pensions can all be applied for this purpose and you may be prepared to sacrifice your equitable share in any or all of these in order to retain your business interest.

The second most common approach taken by the court – and this may be the only option available if there are insufficient other marital assets around in order to off-set your business interest – is deferred sharing of your business interest. Your spouse retains a beneficial share in your shares and, on the ultimate sale of those shares, they receive a percentage of the proceeds. Off-setting can be used in conjunction with deferred sharing such that your spouse’s beneficial interest in the shares is reduced. The downside of deferred sharing is a lack of certainty for the non-shareholding spouse, and a lack of a capital clean break between you. A financial tie between you remains unresolved unless and until the shares are realised.

If you hold unvested stock or share options, deferred sharing is the preferred approach so that the shares, or their cash proceeds, are only divided on receipt. This is because attributing a value to a share option today is nearly impossible, and their vesting may be contingent on your continued work in the company. If you separate part-way through the vesting period, a time-based apportionment may be applied so that only a percentage of the shares are treated as matrimonial.

Specialist tax advice should be taken on the implications of the above options.

How is my interest in the business valued?

When applying the off-setting method, the challenge is in valuing your business interest so as to determine the degree of off-setting that needs to be undertaken elsewhere. It will need to be valued at the time of divorce and, if relevant, at the time of your marriage or cohabitation (if you are seeking to exclude its pre-marital value from your spouse’s sharing claim).

Where the company is at an early stage of development, whereby traditional accounts-based valuation methods may not assist, valuation might rely on recent funding rounds, profit forecasts, any offers for purchase received in the past, or other internal data.

A valuation expert can be jointly instructed to prepare a neutral valuation report. They will analyse the financial information available, compare the company with any comparables in the market and its competitors, and ask questions of the relevant people in the business as necessary. If there are court proceedings in the finances, this expert may be instructed by the court and will prepare a report for the court’s consideration. That expert may be called to give evidence in cross-examination in any final hearing, if the proceedings get to that stage.

What steps can I take to protect my business interest from any future divorce?

If you are not yet married, the best possible protection is a pre-nuptial agreement. You would seek to agree that the full value of the business will be excluded from any future sharing claim that your spouse may have. Please note that you cannot exclude a needs claim, so there is still a risk the value of your business interest will be invaded to some degree to meet a needs claim.

If you are already married, you may enter into a post-nuptial agreement. As with the pre-nuptial agreement, you can seek to agree to ring-fence your business interest from any future sharing claim, but whether or not this will be deemed ‘fair’ (as all nuptial agreements must be in order to be upheld) will depend on the remainder of the financial resources available to you and your spouse in order to meet any needs claim. If your business is your primary marital asset, and (for example) your family home is rented or is heavily mortgaged, it may not be possible to exclude your business from any future claim on divorce, since both of you must be able to meet your financial needs. In that instance, a post-nuptial agreement agreeing that the business is ring-fenced would not be upheld on divorce.

Agreeing a post-nuptial agreement with your spouse during the marriage can be challenging; it will precipitate some difficult conversations and you will both need to instruct family law solicitors to independently advise you on the terms of the agreement. You will also need to exchange disclosure at that time as to your financial situation, including an estimated value of the business. However the exercise could prove utterly invaluable in any future divorce.