As a startup founder you should be aware that executing a contract containing non-compete and non-solicit language with your team member is an excellent way to protect your company. This post focuses on non-compete provisions.

What restrictions are created by non-compete/non-solicit provisions?

At a high level the non-compete language restricts the employee or consultant from the following:

  • Creating a business that competes with the company;
  • Working for a business that competes with the company;
  • Interfering with the company’s customer relationships in any way that hurts the company;
  • Attempting to hire away the company’s employees or consultants.

The signer is bound by this section during his employment or service with the company and for a period after he has left the company (typically 12 months). Any territory in which the company does business is guarded from the signer’s competition as described above.

Note: Various states have their own nuances regarding the enforceability of non-compete and related provisions. Depending on the state, particularly California (where post-termination non-competes are generally not enforceable), you may have to tailor your startup’s non-compete provision.

I trust my team. Why should I have them sign a non-compete?

Simply put, you want to make sure your company won’t be sideswiped by a team member who decides to compete. There have been cases where an employee leaves to work for a competitor and decides to bring their former employer’s secrets with them. Although you may trust your team a non-compete provides an extra layer of protection that the founders should prioritize.

Ok, so who should sign?

The lawyer’s default view is that all employees or consultants must sign some sort of the non-compete agreement. However, that standard view doesn’t make sense when put into practice. If you are a high-tech startup that is working on quantum computing is it vital that your office manager sign a non-compete?

A better rule of thumb is that all executives, founders, people working on intellectual property (especially “core IP”), sales, and people with access to company confidential information (besides mentors as this is not market) must sign a non-compete provision. But in the case of entry-level employees and others not mentioned above, it is more of a nice to have. It is unlikely that you will see an acquisition killed because the marketing intern did not sign a non-compete.

Is there room for negotiation?

DogStroll wants to bring on a rock star full stack engineer named Linda. They agree on the compensation figures, title, and she is ready to hop on board. DogStroll sends its standard employment offer letter and PIIA which contains the non-compete provision. Linda writes back and says, “There is no way I am signing this PIIA.”

What does DogStroll do?

If they like her enough, they negotiate. DogStroll can limit the length or geographic scope of the non-compete. DogStroll may also limit the non-compete to only certain competitors (e.g. Wag!). Such negotiations must balance the flexibility of employment with protecting the company. DogStroll should also, to the best of its ability, request that Linda keep such negotiations private as others may look to also negotiate their non-compete terms.

Final Thoughts.

Non-competes are an effective way to protect your startup from the risk of employees or hires leaving and sharing confidential information with your competitors. However, not everyone must sign a non-compete and the terms are open to negotiation.

Tags: , , , , Last Updated: September 1st, 2020