Divorce Issues for Tech Founders and Early Employees

Washington state is home to numerous companies, many of which are household names, such as Amazon, Boeing, and Microsoft. Others, like Salesforce and Google, maintain a strong presence in the state, including in Seattle, making the city and overall state one of the most significant tech hubs in the U.S. With all of this inspiration in the crisp Pacific Northwest air, it’s no wonder that Washington is also home to thousands of tech founders and early employees. With divorce on the rise and, from time to time, tech layoffs, understanding divorce issues for tech founders and early employees, including who gets the startup, is of paramount importance, even if you’re just contemplating divorce. Read on.  

How Washington’s Community Property Laws Affect Startup Ownership

Ownership of a tech startup can get murky if it becomes the subject of a divorce. At that point, Washington’s unique community property laws regarding asset division would come into play, potentially affecting who owns what in the end. In Washington state, there are several factors courts look at when dividing assets. Among the most significant are how property will be classified and its value. 

How Community Property and Separate Property Are Treated in a Washington State Tech Divorce

As stated above, Washington state is a community property state. Put simply, this means that most assets and debts amassed during a marriage are considered to belong to both spouses, irrespective of whose name appears on a deed, title, paycheck, or account. When discussing tech founders and early employees specifically, assets can include equity, stock options, RSUs, deferred compensation, and bonuses, all of which are common in a Seattle tech divorce, especially when the company has grown beyond its humble beginnings.

Exceptions exist. For one, although separate property is generally defined as assets one spouse owned prior to marriage, property they acquired after the separation date, assets acquired using separate funds, and gifts or inheritances a spouse received individually, to name just a few examples, will be treated as community property if commingled with community assets. This can happen, for example, if one spouse inherits a sum of money and then deposits that inheritance into a joint account into which community funds are also deposited. Or when premarital holdings are used to fund joint expenses 

On a related note, both spouses will generally be liable for debts incurred during the marriage. That is, of course, unless a court order states differently. 

How Washington Courts Calculate Asset Division to Create Fairness in Seattle Tech Divorces

While the term community property suggests an equal split, Washington courts differ from other states in that Washington judges focus on what is fair rather than strictly dividing assets 50/50. As part of their analysis, judges will consider each spouse’s financial situation at the time of the division, how long they were married, and, in cases where there are children and a family home, the possible desirability of having one spouse remain in the home with the minor children for a reasonable period. 

Washington courts will also consider the extent of community and separate property. All property, both community and separate, is before the court for division. For example, a King County court may award one spouse’s separate property to the other spouse. More often, however, if one spouse owns significantly more separate assets, the court will award that spouse all their separate property, and the spouse with fewer separate property assets will receive a bigger share of the couple’s community property. This can be especially relevant when one person has stock options that aren’t yet vested or a stake in a company whose value hasn’t been determined (more about valuation below).

This is because the premise of community property is that the parties’ assets were acquired through their joint efforts. The court does not weigh the relative contributions of the parties to try to quantify which spouse earned more or sacrificed more. The point is that just because one spouse didn’t make a monetary contribution doesn’t mean their non-monetary contribution will be ignored in the division of the couple’s assets. Washington law prioritizes equitable rather than equal asset division. 

Valuing a Tech Startup in Divorce: What Seattle Tech Founders Should Know

Valuing a tech startup during divorce is a lengthy and complicated process. Washington law employs several methods for business valuation. The first is the market approach. This looks at what a buyer would pay today. The second is the income approach, which examines the startup’s earnings. The last is the asset approach, which requires calculating what the business owns minus what it owes. Which approach will be employed depends on the type of business and its stage of development, among other considerations.

For tech startups, the income approach can be more difficult if the company isn’t yet profitable. The market approach can also fall short if there aren’t direct comps. That’s why early-stage valuations often come down to a mix of knowns, including cash, equipment, IP, contracts, and unknowns in terms of growth potential, venture capital interest, and exit strategy. 

This is where having an experienced business valuation professional, particularly one with expertise in tech startups, matters. Your Seattle family law attorney should already have a network of financial professionals they work with often and closely in their tech divorces. Once the business is valued, the question of who owns what and how the monetary equivalent will be distributed will then be resolved by employing community property laws as described above. 

As a Founder or Employee, Can a Prenup or Postnup Protect Your Company in Washington?

If you are a tech founder or early employee contemplating marriage, considering a prenuptial agreement (prenup) to protect your interests can be a smart decision. If you are already married and your spouse is open to it, a postnuptial agreement (postnup) can also be an option for you to simplify the divorce process, should that become an inevitability. Though timing is one noticeable difference between these two documents, it is not the only one. A Seattle marital contracts lawyer can help you decide which would serve you best as a Washington tech founder. 

Strategies for Keeping Your Business Intact During a Divorce

The prospect of divorce and the divorce process can put stress on even the most well-run business. With the threat of asset division, heightened emotions, and an uncertain future, both personally and professionally, Seattle tech founders may find themselves distracted or tempted to make business decisions they wouldn’t have made because they mistakenly believe it will somehow serve them in their divorce. This is unwise.

As a tech founder or early employee, your overarching goal should be to preserve and protect what you have worked so hard to build, as well as its potential for growth. Protection first begins with consulting with a Seattle family law firm experienced in divorces involving tech startups. 

The second is not to make decisions without the advice of legal counsel. Poor decisions can come back to harm you later in various ways, including negatively impacting your settlement. Or worse, if the decisions are illegal. The best course is, therefore, to maintain the status quo until you are advised by them to do otherwise.

The third is to understand that although you have rights, your spouse does, too. Washington family laws are here to create an equitable disposition of the value of your startup, which doesn’t have to lead to its demise but, instead, secure its longevity. 

Find a Seattle Family Law Attorney to Protect Your Startup in Divorce

At Elise Buie Family Law, our team of experienced Seattle divorce lawyers has extensive experience resolving divorces involving a tech startup for both employees and founders. We advocate vehemently for our clients at every stage of the legal process and can protect tech startups of all sizes and ages. We are committed to resolving divorces amicably through alternative dispute resolution techniques, including mediation, collaborative divorce, and arbitration, but we will also pursue litigation when warranted. Contact our office today or schedule a convenient time to speak.