Prenuptial Agreement in High-Tech: What Happens to Shares, Options, and the Startup Upon Separation?

An idea born in a coffee shop, a few lines of code, or an algorithm still in development can, within a few years, turn into a company worth millions. However, precisely at the stage where there is no registered company, no revenue, and no exit on the horizon, complex questions may arise in the future in the event of a separation between spouses.

According to Attorney Merav Aharon of the Aharon & Co. law firm, which specializes in family law and digital inheritance, a prenuptial agreement for entrepreneurs and high-tech employees should not only address existing assets but also rights that may develop in the future.

"A prenuptial agreement is not actually meant to protect only existing rights or shares," she explains. "It is also meant to protect an idea, a patent, code, algorithms, and intellectual property that is in the making." According to her, in the absence of an appropriate agreement, questions may arise in the future regarding how rights and assets created during the shared life will be included in the resource balance, even when they are registered in the name of only one of the spouses.

Why might a generic agreement not be enough?

One of the common mistakes, according to Attorney Aharon, is using a general version of a prenuptial agreement that is not adapted to the special reality of the world of entrepreneurship and high-tech. A couple might find a template online that looks organized, fill in a few personal details, sign it, and feel that the issue is behind them. But when one of the spouses is an entrepreneur, a high-tech employee, or holds rights in a young company, the reality can be much more complex.

"A general version does not deal with this reality of entrepreneurship and high-tech," says Attorney Aharon. "There are many questions that need to be raised, and a prenuptial agreement is actually meant to protect both the entrepreneur and the spouse here. It is not meant to exclude or detract from the spouse's rights."

Among the issues that must be taken into account are the company's increase in value, tax aspects, realization events, and the way a private company that has no clear market value is valued. In a public company, one can usually look at the share price at a certain point in time. In a private startup, however, there is not necessarily such a value that can be determined in a simple way.

And what happens to options that have not yet vested?

The difficulty becomes even sharper when it comes to options or restricted stock units (RSUs), which quite a few high-tech employees receive as part of their compensation package. These rights may be granted today but vest only in a few years, and various developments can occur along the way.

"The fact that an employee has not yet received the rights in practice and that they have not yet vested does not mean they do not exist," explains Attorney Aharon. "There are contractual rights, so the prenuptial agreement must address the grant date, the vesting period, and what happens in the event of dismissal, sale, or merger."

Practically speaking, the question is not only whether a right exists, but also when it was created, when it is expected to vest, and what will happen if the company is sold, or the employee leaves or is fired before vesting.

Investors may also be interested

Not in every deal will an investor delve deeply into the entrepreneur's personal relationships, but as part of due diligence, they may want to understand if there is certainty regarding the rights to shares and ownership of intellectual property.

"The spouse does not automatically become a shareholder," emphasizes Attorney Aharon, "but risks can arise such as requests for injunctions on shares or the company, and these are things an investor is not interested in."

According to her, early and clear regulation can create certainty not only between the spouses but also in the business environment in which the entrepreneur operates.

And what about the spouse who stays at home?

A prenuptial agreement is sometimes identified with an attempt to protect the person who holds the company or shares, but Attorney Aharon emphasizes that a proper agreement should also take into account the contribution of the other spouse.

In many cases, while one of the spouses invests days and nights in establishing the business, the other bears a larger part of the family burden, manages the home, raises the children, or supports during periods when the entrepreneur gives up a regular salary in favor of building the company.

"Prenuptial agreements are not meant to erase the spouse's contribution in this whole process," says Attorney Aharon. "They are also intended to protect them, because they have a contribution that cannot be ignored, whether it is in managing the home or in the economic issue."

She notes that in such cases, it is possible to build mechanisms that take into account the family reality and not just the ownership structure. Thus, for example, it is possible to set tiered financial arrangements, mechanisms for distributing part of the economic value, or other solutions that are built according to the circumstances of the spouses.

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Not just success: what happens when the value plummets?

In the high-tech world, it is easy to think of a scenario where a company succeeds, raises capital, or is sold for a large sum. However, the reality can also move in the opposite direction. Options that look promising at the time of signing the agreement can lose their value, and sometimes their exercise price no longer makes them worthwhile.

According to Attorney Aharon, a proper agreement should also take into account scenarios of value decline and not be built only around future success.

She points to three possible situations: value decline before the valuation date, value decline after the valuation but before payment, and value increase after separation that stems from work performed by the entrepreneur after the end of the shared life.

In each of these situations, a different dispute may arise. One party may argue that the value should be determined according to the point in time when the spouses separated, while the other party may argue that what happened afterwards should be taken into account.

"Such an agreement must address all the risks," says Attorney Aharon. "Each party will come and argue in their favor, so one must take these things and bring them in the best way, and not draft a generic and general agreement, but one that relates to that person and that family unit."

The goal: to create certainty before the dispute begins

Ultimately, a prenuptial agreement in the high-tech world is not just about who gets what in the event of a separation. When it is drafted according to the characteristics of the spouses and the business, it can reduce disputes in advance regarding shares, options, intellectual property, and value increase or decrease.

This complexity begins precisely where it seems there is not much to regulate yet: when the company does not exist yet, the idea is on paper, or the options are still far from vesting. From Attorney Aharon's perspective, this is exactly the stage where it is worth thinking ahead and defining mechanisms that will suit both a situation where the business is very successful and a situation where reality changes.