Business PRENUP: The Only Way to Start-up

Start-ups are the new in vogue business lingo. However, at their heart, they are nothing but corporations, partnerships, LLCs, LLPs, and the like. The Companies Act, 2013, Limited Liability Partnership Act, 2008 and the Partnership Act, 1932 are at the governing heart of these start-ups.

Prenuptial Agreements, Antenuptial Agreements, or Premarital Agreements (commonly referred to as a Prenup), though unenforceable and thus non-existent in India, but prevalent in the US, are written contracts entered into by couples prior to marriage or a civil union that enable them to select and control many of the legal rights they acquire upon marrying, and what happens when their marriage eventually ends by death or divorce. Couples may also enter into written prenuptial agreements to supersede many of the default marital laws that would otherwise apply in the event of divorce, such as the laws that govern the division of property, retirement benefits, savings, and the right to seek alimony (spousal support) with agreed-upon terms that provide certainty and clarify their marital rights. Premarital agreements may also contain waivers of a surviving spouse's right to claim an elective share of the estate of the deceased spouse.

Inspired by the concept of a Prenup, devising strong, well-written shareholder and operating agreements that operate as a “prenup” of the business world is a work of art, and in my experience work wonders. They can dictate the rights and responsibilities of the business owners and founders, anticipate possible conflicts, and spell out the rules of engagement on business matters. If founders someday come to an impasse and need a “divorce,” a good Business Prenup (“BP”) will provide a clean and easy exit. BPs can also ensure minimal disruption to the day-to-day operations of the business, and thus also secure the worth of the business by reflecting positively upon the inner stability of a start-up (something very attractive to VCs). They can also prevent default provisions of the aforesaid enactments from applying, that use their one size fits all demeanor.

BPs can ensure when and how the parties can vote while making decisions about the business, and any limitations on those voting rights. Details on annual distributions to the owners or other members of the business can also be set. A policy that addresses a code of business principles, nepotism, and the rules for hiring individuals whose family members own or work at the business can also be made part of BPs. This works well in situations where start-up founders are friends, and/or relatives, or even betrothed!

BPs can also govern owners' employment terms with the businesses. Employment matters can also be addressed in a separate employment agreement, but terms of founders’ employment or remuneration metrics, and valuation of skill, or what they bring to the table are best discussed in BPs. Similarly, a list of events that would trigger the purchase or sale of an owner’s shares (Buyout Triggers), such as death, disability, bankruptcy, divorce, a management deadlock, or other events can also be put into BPs.

BPs can also detail the relevant valuation formulae, or processes used to value the business when an exit becomes necessary. Lastly, to plan for the future is never a waste, and to show strong corporate fundamentals a plan for business succession is necessary. BPs can also enable business succession in these medically volatile times, where even the young are prone to succumb to a pandemic, and also in the event of disability, bankruptcy, or even divorce.

Just remember that the cost of a BP is minimal compared to the potential cost of litigating disputes in court or at an arbitration. It also ensures the long term success and security of the company.

Originally posted at: https://manuluvshahalia.blogspot.com/2021/07/BussinessPrenupStartups.html