When a divorce involves an individual or couple with an unusually high net worth, the financial details of that marriage often take months to unwind or figure out. People with this level of wealth often have an intricate financial portfolio containing many different types of assets.
Creating an inventory of those assets, determining whether they are marital or separate property, and figuring out how to drive them properly is a significant challenge in high net-worth divorces.
One asset that can complicate divorce proceedings is venture capital interests. In these situations, it is crucial that you work with a high-net-worth divorce attorney to protect your best interests. The team at Kirk Drennan Law can help you advocate for yourself throughout the divorce process. Call us at 205-953-1424 to set up a consultation right away.
The Role of Venture Capital Interests in Divorce
Venture capitalists invest funds in a variety of startups and growing businesses that lack capital but have significant potential for growth. When an individual invests in these projects, they get ownership stakes. They may also provide insight and assistance with technical issues and business expertise. The venture capitalist’s knowledge of business growth and management skills, paired with a founder’s in-depth knowledge of their own field, can lead to massive success in the right conditions.
There are numerous ways you may have venture capital interests, and an individual’s method of ownership affects how those interests are handled in divorce. If someone has equity stakes, they have a direct interest in that company’s success and an ownership share. Convertible securities include preferred stock, convertible notes, and other options that can turn into equity down the line. If someone has limited partnership interests, they have investments in venture capital funds.
As you may imagine, venture capital interests can be very difficult to divide in a divorce. They are illiquid assets, so they can’t easily be turned into cash and split up that way.
Compared to publicly traded companies, companies backed by venture capital funds aren’t nearly as transparent. Getting a fair valuation of a company in this situation is an uphill battle, but you do have options. A financial expert may conduct a comparable company analysis, which draws a comparison between the company in which an individual has ownership shares and similar companies in the same industry. They use that information to secure a fair valuation.
An expert may also recommend the discounted cash flow method, which estimates the future cash flow of the business and attempts to calculate the present value of that future income. The market multiples method involves industry-specific valuation multiples. Finally, the exit valuation strategy predicts the likely future value of the company should it be sold or taken public.
Applying these methods to venture capital interests may give a fair view of its true worth. However, there’s no way to get around the fact that startups and growing companies are inherently volatile and risky, so their value is always in question.
Once you’ve settled the value of venture capital interests, figuring out how to split those interests fairly is the next challenge. It’s common for the individual who initially made the investment to buy out the other spouse’s share of the interests. This allows them to maintain control and avoids the inherent difficulties associated with divvying up business interests. However, be prepared to negotiate on the fair buyout value—the risky nature of these investments, paired with the potential for massive financial rewards, can make negotiations a struggle.
It may also be helpful to defer the distribution of these assets. Once the venture capital interests actually pay out down the road, the money earned from the project is divided equitably. This isn’t ideal for those who need the money from the division of assets to get started on the next chapter of their life.
Fight for Your Best Interests with Kirk Drennan Law
The challenges of a high-net-worth divorce can cause significant stress and anxiety. With the right legal team by your side, you can be confident about what comes next. Let’s talk more about your options. Set up a consultation at our Birmingham office by contacting us online or calling us at 205-953-1424.