Angel Investors: Venture capital funds, angel investors seek spousal partnership protections

Venture capital (VC) funds and angel investors are beginning to ask spouses for clearer explanations of their roles, responsibilities and any special rights given to either of them when forming a company.

Often times, founders appoint their spouses as co-founders when launching a venture, but if the spouses choose to separate after a few rounds of funding, it can be a pain for investors to deal with the breakup as they now have to deal with a disgruntled spouse who is also a shareholder in the company.

Enhance your tech skills with high-value skills courses. University Course Offerings Website Indian School of Business Professional Certificate in Product Management Visit IIT Delhi Certificate Program in Data Science and Machine Learning Visit MIT xPROMIT Technology Leadership and Innovation Visit Ishika Tolani, a lawyer practicing in Mumbai's family courts, says, “Investors are seeking clarity on Share Holding Agreements (SHAs) between co-founders who are also partners, and we have advised on eight enquiries in the last two quarters.” “No one wants their shares to be stuck in bitter divorce litigation for years, as that will have a detrimental effect on the value and growth of the company,” Tolani adds.

Investors are looking for details such as whether the spouse holds common stock or Class B non-voting shares, whether the shares include purchase preferences, and even whether they can inherit assets and equity in the event of an unforeseen event, and they want these issues clarified before the co-founder spouse makes an investment.

Find Stories That Interest YouIn the past, startups like Zoho, co-founded by Sridhar Vembu and his wife Pramila Srinivasan, online marketplace ShopClues, and data analytics company Mu Sigma have witnessed such separations of co-founder spouses. Gujarat-based angel investor Nikhil Parmar said he has seen many companies thrive and collapse due to spousal issues. India has seen rising divorce rates and increased conflicts as a result of the expansion of nuclear family culture in tier 1 cities and the introduction of Western culture, and it is very important that investors take this into consideration while investing funds and ensure that there is no or less dead equity in the company, Parmar said. Some of the examples that have worked for me as an investor are Zypp Electric, Hesa, Fitspire etc, where spouses are co-founders and run the company, added Parmar, who is also founder of Impactful Pitch, a fundraising advisory for startups.

Anisha Patnaik, founder of boutique law firm LexStart, said there is an increasing trend to review shareholder agreements, particularly in terms of the impact on founders' shareholding in various exit scenarios (with or without marital status).

But when spouses are partners, considerations like inheritance and probate become especially important because of the complexities of overlapping personal and professional dynamics, said Patnaik, who also has invested as an angel investor in about a dozen startups. Personal conflicts like divorce and separation bring the added complication of asset ownership, and in most cases, company shares are essential.

In another context, Yash Vardhan Singh of law firm Sarvank Associates said apart from fearing separation between co-founder spouses, investors are amending governing documents such as SHAs and empowering other key managing persons (KMPs) to have more checks and balances to avoid scenarios like favouritism between spouses, which could lead to collusion and reduce transparency in the running of the company.

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