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Divorce Destroys Capital (kpkaiser.com)
65 points by burningion on July 10, 2010 | hide | past | web | favorite | 86 comments

Actually, litigation and selling illiquid assets destroy capital. The divorce angle of the article is just to add some outrage to an otherwise ordinary situation. Sell your business when nobody wants it, and you don't make much money. Sell your business when it's super-hot and awesome, you make a lot of money. It's called a "market".

To be fair, divorce is the most likely reason the average person will have for winding up in expensive litigation and people are more likely to pursue it to the point of ruin because of the emotions involved.

Also bear in mind the fact that husbands can frequently be held accountable for their spouse's legal fees and you have a situation which creates a perverse incentive for litigation to continue.

My parents got divorced, and both had a bit of money and assets. They each hired a lawyer, split the assets, and that was that.

I think people are basing their decisions with respect to marriage and divorce on what they hear on TV (or social drama sites), rather than actual data. Oh well, HN readers are people too...

Also, the story this article is about would have ended the same way if he needed to sell the company to pay off some other arbitrary debt; margin call on a bad investment, the mortgage on his underwater home, anything. Divorce isn't relevant to the "life lesson". (Which is, "if you have to do something right now, you're not going to get a good price". I think I'll call it the "Best Buy" effect.)

I agree with you, it is when people want to hurt each other that they end up with nothing, spending it all to keep the other side in court until they are broke or give up.

Did you read the article? The reason he had to sell his portion of the business for a pittance was because the buyer knew he was desperate for cash which was caused by the divorce.

Marriage is a lie. In America and much of Europe, just under half of marriages end in divorce. Any honest person would answer their vows with not "I do" but "probably". We like the idea of lifelong fidelity, but it simply isn't a practical reality for most people. We need to be honest with ourselves.

We're all smart people here. None of us would be so stupid as to sign a really bad VC agreement because we really liked the VC. Why do so many of us willingly sign bad contracts in our personal life? If someone here was signing an agreement with a startup cofounder that had no stock vesting clause and no provisions to secure IP, we'd be in like a shot to warn them. If someone here announced their engagement, I'm sure we'd all congratulate them. Marriage is objectively a terrible financial deal, particularly for the likes of us, but we ignore how bad a deal it is for purely sentimental reasons.

This is an entirely money-centric view of things. This is like saying going to a movie is a bad deal because you spent $15, 2 hours of time, and ended up with nothing financially useful at the end. Marriages are not usually primarily financial contracts, VC contracts primarily are.

Money is an abstraction, a means to an end, not the end. For many (most?) people, that intended end is a happy, healthy, safe family, which is hard to do without marriage.

Well, that's not really true. Any two people, remember can hold any ceremony they want in front of their friends, call themselves whatever they want, live together, have kids, whatever.

Marriage however is very specifically a contract between two individuals and the State. You get a marriage license and you file the paperwork at City Hall. The State's interest is obvious: it wants new, well-adjusted citizens. So the contract says, we'll give you these privileges (in tax, immigration, etc) and you do your bit. Part of that is, all property becomes the property of the new entity. So yeah, the only difference between "getting married" and doing it yourself is the contract.

Strictly legally speaking, sure, but marriage is much more than a legal contract in reality. The ceremony, living together, commitment etc. is most of the definition of marriage. That activity your describing has been called marriage for thousands of years, with or without legal components, and just because some people are doing it now without making it legally binding doesn't make it something fundamentally different from marriage.

I'm curious if anyone in the anti-marriage camp has children.

I've heard the "marriage is an anachronism" argument for many years, exclusively from childless couples.

If that's true - and it may be just due to small sample size of my personal experience - then it implies confirmation bias on both sides of the debate.

Is anyone here in a committed, non-married relationship with kids?

I'm not-- I'm happily married with four kids-- but here in Norway, committed, non-married relationships with kids are extremely common. In fact, a majority of children in Norway are born outside of wedlock (a fact that nobody views as a problem.)

Also worth noting is that co-habiting partners have almost all of the same rights as married partners, so legally, there's not much difference if one marries or not.

I criticize the institution of marriage even though I'm happily married and we're expecting a child. I would still want to have a monogamous, long term relationship with my wife, only every time I think about the institution (and the Mike Huckabees, Pat Robertsons and Barack Obamas of the world claiming that marriage is between a man and a woman) I get an icky feeling like I'm a member of a racist country club or that I inherited a Nazi fortune.

The bond between two people is only as valid/strong/durable as the commitment. There is no reason to preserve a tradition that has been co-opted by social conservatives and now symbolizes bigotry more than it serves a practical purpose.

Furthermore, all the social meddling (tax rates, special privileges) makes me feel like a pawn.

Ex-husband & I have one child. My current partner (also divorced) & I are not married and we have two children.

I was, until I got married.

Maybe we are not all smart people - can you please explain why marriage is "a lie"? Do you mean some marriages or "marriage" itself?

I don't consider my marriage "a lie" or "a bad contract", and certainly not a "financial deal". I'm not sure why you do, or why you believe I am being dishonest, or that I was dishonest when I made my vows.

If you seriously think that people should say "probably" to a "bad contract" then I wonder what you think your signature is worth on other contracts.

I do understand that human integrity is variable, and values vary. I don't wish to impose mine on you.

Saying "probably" is a way of avoiding dishonestly over-representing his confidence in the marriage lasting. Obviously you're offended, but don't let that be an excuse to let your reasoning slip.

No slipping reasoning here.

OP: "Any honest person would answer their vows with not "I do" but "probably".

I answered mine with "I do". Does that make me a dishonest person? Did you read my vows?

Are mortgages also a lie? Should everyone have signed "probably" in case they ended up in jingle-mail territory? Are then then dishonest people? I think not. Perhaps my honesty bar is set too low, but, again, I think not.

Saying that a commitment question (Yes/no, In/out, etc) should be answered with "probably" is a little strange, and a little naive, I think.

Statistically, 4 in 10 people who say "I do" will be proved wrong eventually, but nobody ever considers for a minute that it will be them. Everyone thinks that they are special, that they will beat the odds, that the rules of probability do not apply to them.

If 40% of mortgages ended in default, it would be a national emergency, but for some reason we accept that close to half of marriages end in divorce. The vows of marriage clearly fail to reflect how people actually decide to live their lives. In that sense, marriage is an outmoded institution, one I feel is in urgent need of revision.

We have to accept as a society that while the majority of us say we want to pair for life, a very large proportion of us actually do not want that. The cultural fallout of these dashed hopes and broken promises is truly toxic. We are collectively living in denial. We are telling children that mummy and daddy will be together forever, in spite of overwhelming evidence to the contrary. We need to be more honest and rational, to ourselves and to others.

Fifty years ago, divorce was rare. A hundred years ago, it was unheard of. At some point in the near future, divorce will be the most likely end of a marriage. The costs to society are clearly enormous and we urgently need to revise the legal nature of marriage to better reflect the practical reality. I do not oppose marriage; I oppose an outmoded version of marriage that enshrines self-deception and the deception of others into law.

Our cultural and legal concept of marriage is very specific and is in no way definitive. In many parts of the Islamic world, marriage can legally be of a fixed length, with exit terms prearranged. This to me seems far more rational, in preserving the true purpose of marriage (the protection of patrilineage) while allowing for more long-term flexibility and reducing the costs of divorce to near-zero.

> Statistically, 4 in 10 people who say "I do" will be proved wrong eventually

Being proven wrong does not make you a liar, nor dishonest.

A commitment question is not a probability question, it asks whether you are in or out. Is it more honest to answer "probably" when asked whether you want another card when drawing 14 at blackjack? Are you dishonest if it turns out you made a mistake?

> the majority of us say we want to pair for life, a very large proportion of us actually do not want that.

So...the one group should force their viewpoint on the other?

> We need to be more honest and rational, to ourselves and to others.

I think I am being completely honest and rational. I don't tell my kids mummy and daddy will be together for ever, I tell them what the plan is.

> The costs to society are clearly enormous

Do you mean social costs or financial costs? How are the costs reduced if there is no marriage (except for in litigious societies, and if you removed marriage in them then lawsuits would simply shift to the next level)?

> Our cultural and legal concept of marriage is very specific

Yours or mine? You state that "marriage is a lie". I think it is not for everyone, but some people like it.

In my country, the costs of divorce are near-zero. Maybe it is expensive in some countries. Why then is that a problem with marriage, and not with that countries legal and social system?

Why is marriage "a lie"? Why is it dishonest to say "I do"?

Edit: Note that I think you are very likely right about marriage needing reform in the way that it fits into some modern societies. However, the terms you use to describe many people's happy lifestyles, people who may well think about things just as much as you, are somewhat inflammatory.

My marriage is one of the best things in my life, and having it described as a lie and myself described as dishonest is offensive, I guess.

Society has changed a lot, but maybe marriage is not the thing that needs changing to fix the problems you see.

Amen. An entertaining polemic that discusses some of these issues is "Against Love" by Laura Kipnis.

It seems to me that conservatives - if they really do stand for "small government" - would oppose the concept of legalized marriages, in which we are all expected to submit our personal relationship for approval by the government. If that's not intrusive state power, what is? Yet even the most diehard libertarians rarely question the validity of state-sanctioned marriage.

On the contrary, it's almost exclusively die hard libertarians criticizing state sanctioned marriage.

The main reason more libertarians (as opposed to good/small govt conservatives) don't criticize state sanctioned marriage is that most are unaware of how large the subsidies to married couples actually are. Many people think marriage is nothing more than a standardized contract between two people.

Not to mention: marriage is the number one cause of divorce ;)

Just like birth is the number one cause of death. ;-)

only, you can choose not to get married :)

To be someone more precise in language, this article really make the point that divorce transfers capital from the unlucky couple to a pair of fortunate lawyers. Capital is not so much destroyed as transferred.

I think he does make the point that divorce does more than transfer capital from the unlucky couple to lawyers. There's also a value transfer from the unlucky couple to the person who provides liquidity by buying the couple's business for cheap.

Using his example, the value of the couple pre-divorce was (roughly): (A) $1,000,000 in value for his share of his business, plus (B) $55,000 in cash. That's $1,055,000 in value, or $527,500 for each partner.

After the divorce, the value of the couple is: (A) $250,000 in value for his share of the business (because of a quick sale of an illiquid business), plus (B) $0 in cash ($55k in cash to lawyers). That's a total of $250k, or $125k for each partner.

The majority of the value transfer, then, goes to the buyer of the couple's illiquid business, which must be sold too-quickly. Or, to take a more charitable view of the buyer, the fall in value may be from the value destruction from one of the partners suddenly exiting the business.

A business with the current input of one of its founders, motivated by a large share of ownership, is very probably a less valuable organization without that input. I would bet that the situation described in the article definitely amounted to destruction of wealth and wealth-generating capability.

As if the only thing that happens when you hire a lawyer is you pay them money. The "capital" that is destroyed is ultimately the lawyers' time and energy.

It's only partially transfer of capital. Significant chunk of capital is destroyed: business does not function properly, because one of the owners is under duress, lawyers have to spend their time and efforts "transferring capital", ...

Yeah, this isn't at all the article I was expecting because of that.

Lawyers are a transaction cost of transfer of property in divorces. Even without direct destruction of the value of the property, the transaction cost hurts economic efficiency, see e.g. Coase theorem.

Interesting that both this article and Elon Musk's piece recently (also on HN) suggest that lawyers encourage creating conflict to serve their own interests.

Serious long term relationships are great. "Marriage" is a silly, bigoted custom that should just go away.

I fail to understand how you simply ignoring it is not a better option.

That would seem a more efficient, happy, and logical path to me.

I don't like X, therefore, instead of ignoring X, I think everyone else should stop doing X because I said so. Sounds silly when put that way, doesn't it?

Also, downvoted for implying my marriage is silly and/or somehow bigoted, ;)

He didn't say it in the best possible way but in essence I think the point is that if you want to guarantee to you don't go through divorce hell, simply never get married. Or married with rock-solid prenup, plus be very careful about what state you're living in law-wise. Easy? No. But probably easier than trying to single-handlely change laws and change lawyer culture.

That seems very much like saying "The best way to make sure your startup never fails is to not start one." Or "The best way to make sure you don't fail out of college is to not attend one."

It's odd how in so many other situations, HN readers would rather take the risky-but-personally-fulfilling path, even if the numbers don't quite work out. Yet when it comes to marriage, everybody seems to say "Don't bother because you may fail."

When it comes to long term romantic relationships, people say "don't tie your romantic relationship to a dangerous financial contract which is loaded against you."

The usual advice about startups, namely "incorporate and get everything in writing early" is very similar advice. Incorporation and contracts limit your liability in much the same way that avoiding marriage does.

It seems a lot of people here are tainted by the litigious society they live in, and have decided that marriage is the bad guy, a "liability", and want to stop everyone's marriages. I reject your viewpoint of my marriage and will remain in my non-litigious society. I feel a bit sorry for others.

I fail to see the analogy between a startup and a marriage, and I'm a bit curious on why so many others see it. A long bow to draw, I think.

I am in favor of people having serious relationships, long term and not long term. I just don't think the state or religious institutions ought to have anything to do with it.

Any commitment is only as strong as the people who make it. Marriage is a meaningless stamp on a relationship.

Serious long term relationships are great, but without some kind of well-understood commitment like marriage there's nothing keeping two people together for life.

When everything is going great in my marriage, I don't need a reminder that I'm obligated to stay with my wife. It's when things suck that my ring, my vows, and my marriage certificate are beneficial. They keep me there because I know that if I break them, I'd be a liar. And I know my wife will stick with me when things are tough because she's made the same commitment.

If marriage is silly, are contracts between employers and employees and between founders and investors also silly? If not, why?

Some differences between marriage and those contracts you mentioned...

* they have performance requirements * they aren't life long commitments

If you don't perform well as a CEO the board can fire you. And you don't get to keep half of their personal net worth either.

You make a valid point that when things are tough, marriage helps you stay together. But it seems like for the wrong reason (fear of divorce, rather than love of the person).

It also seems likely that if the other person know's it's difficult for you to leave, they may not try as hard.

This same problem exists when professors get tenure, when you sign a 2 year contract with AT&T, or any long term contract that locks you in.

You're certainly right about the effects of being in a long-term relationship/contract. That's why things work much better when one has an attitude of, "I'm in this for the long haul- I better make an effort to straighten things out," rather than, "It's hard for my spouse to end this thing so I can slack off and be selfish."

None of that is because your bond was sanctioned by the state or church... you might as well call yourselves "joined" or "committed" or "unioned".

Marriage is the term that only validates relationships deemed OK by the state or church. It is a mechanism of social control and if anything undermines the gravity of two people's commitment to each other.

If marriage is silly, are contracts between employers and employees and between founders and investors also silly?

If your employment contract commits your entire lifetime to the company, then yes, it is silly, and will be deemed unenforceable in any court in the civilized world.

No, marriage is fine. The question to ask is why should couples get tax benefits just by being a couple? The state wishes to have a stable or growing population, but marriage is no longer a prerequisite for that, nor is it a "booster".

So why should unmarried couples pay more taxes than married couples? Why should singles?

In some cases married couples pay more in taxes! The actual effect is to tax the lower earner more highly, which (if the two have separate accounts) puts more power in the hands of the higher earner (traditionally this was usually the man).

I agree that one's marital status should not impact anything relating to government services, including taxes.

Marriage used to be about survival. Two people together making more (food, shelter, money, whatever material) than two people separately, thus increasing the chances of surviving.

However, no later than maybe the 60's or 70's marriage seems to represent the need for a person to grow in life, personally and psychologically. It's about two people being together not because they couldn't survive alone but because they want to learn about life together and through each other.

That is, loving the other person by showing them their weaknesses and being loved by letting the other do the same. Rather than physical survival, the process of growing in life won't necessarily benefit for a life-time commitment.

This is reflected in the divorce rates.

People tolerate each other to the extent they are willing to grow. There's no other reason for marriage any more than to artificially keep the people together a bit longer, should one or both of them decide that they just met their extent sooner than they thought.

* * *

Disclaimer: I'm married. For me, it's good, I want to be married rather than just in a long-term relationship. We have a prenuptial agreement (for the case of a divorce only) to dissociate our marriage from our individual and financial lives. Most of our current spending and money is joint while we live together, which hopefully is a long time.

Is your assertion itself not bigoted?

Marriage is the sanction of two people's private agreement by a religious institution or a government. Who needs that?

Both religious groups and governments have bigoted policies about who may marry. There is really no defense of it. It's a crude, outdated custom, and any relationship is only as strong as the commitment of the people in it, no more so, no less.

[citation needed]?

What is the possibility of simply socially informing your friends and family that you are "married" to your significant other, changing your last names to match, and signing a contract that you will support her/him for x number of years after any split?

If you both love each other, there is no problem. If it does not work out, there is a monetary split as you defined in the contract, so no one is taken advantage of, and both people are secure for some amount of time until they can move on to a new job/new relationship etc.

That way you don't have to waste 10 grand paying lawyers to setup a prenup so that you don't have to waste 50 grand paying lawyers to handle a divorce settlement.

You'd miss out on a lot of marriage benefits with this strategy - jointly filing taxes, tax free inheritance to your spouse, hospital visitation rights, sharing your health insurance, and a lot more

Joint filing of taxes often results in paying more taxes, and spreads liability across both spouses, so both can be held accountable if the other one commits fraud.

> and spreads liability across both spouses, so both can be held accountable if the other one commits fraud.

I think you're doing it wrong.

Married filing jointly shares liability. Married filing separately offers worse rates.

Under UK law, if you live together as a married couple, then you effectively legally are a married couple. 'Common-law' marriage.

It only holds if you really do live like a married couple and people would reasonably assume you were married - but it would apply in this case.

So this 'work around' would still get the benefits of being married - but also wouldn't avoid any divorce issues.

(Citation needed) - As I understand it, there is no such thing as common-law marriage in English law, and any reference to such is a reference to American common-law marriage. Cohabitation is different - part of means-tested benefits etc. - but it doesn't imply rights or obligations.

My mistake - looks like it's no longer true.

It DID apply in Scotland (as "marriage by cohabitation with habit and repute" - 'common law marriage' is a much easier term to remember) until 2006. I had reason to check on it in 2004 and hadn't realised it had changed.

A few US states recognize common law marriage, or did within the last quarter century. South Carolina, I know is or was one--a mistress of William Hurt's offered the theory that they had been man and wife during the few weeks he was there for a movie.

Meanwhile, over in Europe, we're all scratching our heads and wondering why you would need lawyers to setup a prenup or handle the divorce.

This might work for a lot of the people on HN, but if you're part of a mainstream religious group your Priest/Rabbi/Pastor will probably insist on maintaining the legalities.

"You need to file the marriage certificate on Monday."

"OK, we'll do that."

Then don't.

Well, in my case it worked the other way around. "We need to see the marriage license at least two weeks before the wedding."

The key mistake in that case was having strong negative emotions to each other. Divorce should be handled as a business deal with emotions being held under control.

Ok, I get the argument that, on a personal level, divorce destroys your savings. But as far as capital goes, divorce destroys as much of it as marriage creates, namely none.

And besides, when I get married, it will be forever ;)

Maybe what entrepreneurs need is a "Series AA"-style prenup to protect startup equity?

Prenups don't fully hold up in court, and it's not uncommon for concessions to be made outside of the agreement.

Why don't prenups fully hold up in court, and what can be done to ensure you're protected?

Protected from the one you love and want to spend the rest of your life with? The best protection is not marrying any person not totally committed to you and the 2nd best protection is not to be a jackass to the one you love. The 3rd best protection is a secret bank account in another country that she doesn't know about.

People change over time, and people are not always infallible judges of character. You have no way of guaranteeing that the person you marry is actually totally committed to you and you have no way of guaranteeing that that won't change over time.

Seeking protection from unforeseen changes is a prudent thing to do.

> Seeking protection from unforeseen changes is a prudent thing to do.

Since it is unlikely that unless there is a huge benefit to signing a prenuptial agreement a woman isn't likely going to an alternative is to trick her by getting married in a state with laws that are beneficial to the income earner and not the spouse. You promise a nice wedding at a country club in xyz state, she thinks it is sooo romantic and that you are awsome.

In reality when you dump her for a newer skinnier model she finds out that she has spent the last xx years with you for nothing because the state laws don't provide for an equal split of the assets. Out of kindness you buy her a used cheap RV so she isn't homeless and give her $200 so she can eat for a little bit while she signs up for welfare.

Interesting idea but I don't think you have to trick a girl into anything.

Since it is unlikely that unless there is a huge benefit to signing a prenuptial agreement a woman isn't likely going to

Then you don't marry her. Really, if someone isn't willing to sign a fair agreement for your (and her) protection before the relationship then you don't want to be with them.

she finds out that she has spent the last xx years with you for nothing

Apart from the enjoyment, the love, the emotional support and all of the other things that long term relationships are supposed to provide. If she's staying with you because she thinks there's going to be some financial payoff then there's something gravely wrong with the relationship.

>Since it is unlikely that unless there is a huge benefit to signing a prenuptial agreement a woman isn't likely going to Then you don't marry her.

Say that in California, and the prenup is invalid.

Which is one reason nobody should ever be married in California.

> "If she's staying with you because she thinks there's going to be some financial payoff then there's something gravely wrong with the relationship."

exactly. instead, just leave the cash on a bureau top or bedside table where she can find it easily. the exchange is still implied on both parts, and you both still win because she gets her money reward earlier and the man doesn't have to worry about being destroyed financially 10 years down the line.

(tongue somewhat in cheek)

That is sentimental bullshit and exactly why people don't sign prenups.

You wouldn't get an investor without an agreement, you wouldn't get a co-founder without an agreement, you shouldn't get a wife without an agreement.

I have been married for 15 years, if I am ever to be successful I want to share that with my wife who has had our two children and provides me company. I am surprised others wouldn't share the same view. Being married is not like hiring someone.

Thats a different thing - what I am primarily trying to avoid is the case where you end up broken, hateful of your former lover and have to waste a ton of money in court to be allowed to see your children.

I doubt a prenup would prevent you from sharing your wealth with your wife though.

> That is sentimental bullshit

Yes - what's wrong with that? What do you think marriages are about? Business?

It's not the "sentimental" part that's objectionable, it's the "bullshit" part. Marry someone you love, marry someone you trust, of course. But understand that the future is unpredictable and forever is a long time -- there's nothing wrong with being prepared.

IANAL, but this is how one explained it to me: Varies by state in the U.S., but basically, the longer you are married, the less binding the prenup. Married for 8 years with two kids and the judge can just ignore the prenup. Married 1 year, no kids, prenup matters.

Whether a prenup can withstand a challenge depends on the circumstances surrounding the creation and execution of the prenup. State laws vary on what is necessary for a valid prenup. The length of marriage is irrelevant to the viability of the prenup. The existence of offspring is likewise irrelevant. A judge cannot ignore a prenup for circumstances that come about after the prenup is signed.

However, judges can and do use any technical or substantive problems with the prenup, however small, to justify striking down inequitable prenups. The usual problem: the wealthier spouse did not disclose all financial assets and liabilities. Something as simple as not disclosing a checking account with a $0.01 balance can invalidate a prenup protecting millions.


People can claim that they were deceived when the prenup was signed. "He didn't tell me about his extra bank account when we were married. If I knew about that I would have insisted on a different prenup"

Not to mention - most couples think it all going to work out.

Thinking that marriage would work out is probably right thing to do in most cases: - There is no additional legal effort up front. - There is no emotional toll of dealing with the prenup. - There is a good chance that divorce would not happen. - If divorce does happen -- standard divorce rules most likely would not be too different from prenup terms.

I guess http://en.wikipedia.org/wiki/Surrogacy is better than marriage.

Could he possibly have agreed to sell at a low price to spite his ex-wife?

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