Venture capital (VC) funds and angel investors have started to seek more clarity from cofounders, who are also spouses, about their roles, responsibilities and any special rights given to either of them at the time of the company’s inception.
In several instances, founders often name their spouses as cofounders at the time of the inception of their venture. However, if the spouses choose to part ways after a few rounds of funding, at that time, dealing with that separation becomes messy for investors as they have to deal with disgruntled spouses who are also shareholders of companies.
“We have advised in eight such queries in the last two quarters, where investors are seeking more clarity regarding the shareholding agreements (SHA) between cofounders who are also the significant other,” said Ishika Tolani, practising advocate at Family Court in Mumbai.
“Nobody wants the shares to be stuck in acrimonious divorce cases for years, as it would badly affect the company’s value and
growth,” adds Tolani.
The investors are seeking details such as whether spouses have common stock or ‘class – B’ non-voting dividend shares, do their shares include rights of first refusal and even inheritance of their assets and stake in the case of any unforeseen incidents are some of the issues investors want cofounder spouses to clarify before they commit any investments.
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In the past, startups such as Zoho, co-founded by Sridhar Vembu and his wife Pramila Srinivasan, online marketplace ShopClues and data analytics firm Mu Sigma have witnessed such separation of cofounder spouses. Nikhil Parmar, a Gujarat-based angel investor, said he has seen many businesses flourishing as well as going bankrupt due to spousal relationships.
“As India is observing a rise in divorce rates and increased disputes as a result of the expansion of nuclear family culture and adoption to western culture in top tier cities, it is critical for investors to take it into consideration while they invest funds and ensure that there is no/less dead equity on the company,” said Parmar.
“A few of the examples that have worked out well for me as an investor are companies like Zypp Electric, Hesa and Fitspire, which are run by the spouses being co-founders,” added Parmar, who is also a founder of Impactful Pitch, a fundraising advisory for startups.
Anisha Patnaik, founder of a boutique law firm LexStart, said the trend of revisiting shareholders’ agreements, especially from the perspective of the consequences on a founder’s shareholding in various exit scenarios (whether spouses or not) is on the uptick.
“However, when spouses are partners, considerations such as succession and inheritance become particularly important due to the complexity of overlapping personal and professional dynamics,” said Patnaik, also an angel investor in about a dozen startups. “Personal conflicts, such as divorces or separations, bring with them the added complexity of ownership of assets, shares of the company in most
cases being integral.”
In a different context, Yash Vardhan Singh of law firm Sarvaank Associates, said it’s not just fear of separation between cofounder spouses, but investors are putting more checks and balances by amending their governing documents such as SHAs and giving power to other key managerial personnel (KMPs) to avoid scenarios like favouritism among spouses which may lead to connivance and reduce transparency in the operation of the company.