TLDR:
- VC funds and angel investors are seeking more clarity from cofounders who are spouses to avoid messy separations that could impact company value.
- Investors are asking cofounder spouses to clarify details such as shareholding agreements, rights, and inheritance.
In a recent article by The Economic Times, it has been highlighted that venture capital (VC) funds and angel investors are now seeking safeguards in spousal partnerships to avoid potential conflicts in case of separations. The article points out that in many instances, founders often name their spouses as cofounders at the inception of their venture. However, if the spouses choose to part ways after a few rounds of funding, it can become messy for investors dealing with disgruntled spouses who are also shareholders of the companies.
According to Ishika Tolani, a practicing advocate at Family Court in Mumbai, there have been eight queries in the last two quarters from investors seeking more clarity regarding shareholding agreements between cofounders who are also significant others. Investors want to ensure that shares are not stuck in acrimonious divorce cases for years, affecting the company’s value and growth.
Investors are now seeking details from cofounder spouses such as whether they have common stock or non-voting dividend shares, rights of first refusal, and inheritance of assets and stake in case of unforeseen incidents. This shift in approach comes as a response to cases like Zoho, ShopClues, and Mu Sigma, where cofounder spouses have separated, impacting the businesses.
Angel investor Nikhil Parmar emphasized the importance of considering the rise in divorce rates in India and taking it into account while investing funds to ensure there is minimal impact on company equity in case of separations. He mentioned successful examples of companies like Zypp Electric, Hesa, and Fitspire run by spouses as co-founders, showing that such partnerships can work well.
The trend of revisiting shareholders’ agreements is on the rise, especially when spouses are partners, as considerations such as succession and inheritance become crucial due to overlapping personal and professional dynamics. Investors are also amending governing documents to avoid scenarios like favoritism among spouses, which may lead to transparency issues in company operations.
In conclusion, VC funds and angel investors are focusing on setting safeguards and seeking more clarity from cofounder spouses to mitigate potential risks and conflicts in spousal partnerships, ensuring the smooth operation and growth of the companies they invest in.
