More Startup Agreements
Last week, in our What’s Up Wednesday article (September 25, 2019), we discussed some of the constraints that agreements with past employers can place on you as you consider the hows and whens of forming a startup. Today we offer a continuation of that explanation.
The State of California offers startups several benefits (availability of qualified talent is undoubtedly the key motivator for most tech startups that choose to locate there). If you are an inventor who plans to work on side projects, projects of your own and for your own enrichment, even as you’re gainfully employed by another concern, you may want to consider taking root in the Golden State. You will find that California is among the best U.S. states at protecting the rights of inventors who split their time between personal projects and standard employment – provided that the outside-of-work invention is: 1) produced 100% on employee’s own time; 2) has been accomplished 100% without assistance of employer’s equipment, workspace, or personnel; 3) was not derived directly from an inventor’s association with his or her employer (i.e.by illegally using patents or trade secrets to which the worker was exposed); 4) be unrelated to the products offered by an employer. In certain cases an Assignment of Invention Agreement may, by its terms (and the enforceability of terms in an agreement will vary from one state to another) require that you as an inventor alert your previous employer to the existence of any invention created within a specified time period (a year or less usually) from the date of your last employment. If you signed a document containing this provision, be advised that you may be required to abide by it, depending on your state. Some employers, not a vast majority, and a little trickily on their part perhaps, will include such provisions not in agreements but in some of their standard documents of employment (the implication here is clear, that these secondary documents are likelier to be skimmed over and specific binding language missed). These sorts of inclusions by an employer can be enforceable depending on your state and what sort of product is at issue (states will often choose to protect an ex-employer’s business interests if it comes to a dispute about copyright, trademark, or patent infringement). Needless to say, it’s better to honor any agreement, if this is possible, than to ignore it and risk a messy legal suit – or you can always wait the period out, depending on how onerous that period is and the nature of the product you’re bringing to market (we recognize that products sometimes need to come to market as soon as they’re viable, especially those in the ultra-competitive technology sphere, but if you’re offering something extremely unique, a product that for all intents and purposes is in a niche of its own, you may be able to delay its introduction until the provisions included in any documents you signed are defunct).
You may be subject to a non-compete clause or provision. In most states, you and your startup can expect these to be legally enforceable, if they are considered “reasonable” by a court. It’s not reasonable for an employer to lock you or another employee into a non-compete for twenty-five years (which would translate into an even three hundred months). A document this blatantly one-sided would probably not be enforceable in the most backward of U.S. states. On the other hand, non-competes of up to two years or twenty-four months tend to be defensible in many jurisdictions. One exception to this is the State of California, which will normally not enforce non-compete provisions (many companies based in California have abandoned such language in standard documents and even some formal agreements because California courts have made it unprofitable to legally defend or impose these provisions, essentially rendering them valueless in all but the most extreme cases – for instance if a company is sold or otherwise changes hands it is customary, in order to protect the interests of a new owner, for the original ownership group or selling parties to be bound by a non-compete for some duration – and if such a situation ever arises, expect a non-compete executed under these particular conditions to be enforced adamantly by state courts, including those in California). You should be aware also that, in most cases, simply changing locations, performing a switch of locales, perhaps relocating to another state to found your startup, a place that would seem comfortably distant from your meddlesome ex-employer, will rarely negate any aspects of a signed and valid non-compete. If there are geographical boundaries to the agreement (there can be), it should be spelled out in specific language in the agreement you sign or have signed.
Here are some of the common prohibitions you’ll encounter in a non-compete: 1) forbids virtually any level of contact between yourself and (usually) what would be considered an immediate business rival or competitor of your former employer, for whatever time period the language dictates – this means as an advisor, advocate, agent, consultant, contractor, director, employee, independent contractor, lobbyist, officer, operator, owner, partner, proprietor, etc.; 2) forbids virtually all ownership (in shares of stock) of an immediate business rival or competitor; 3) forbids the control, financing, management, direction, or similar operation of an immediate or potential business rival or competitor. Prior to founding your startup, you must have a clear understanding of the parameters that such agreements (and any other pertinent signed documents from your employment past (and it may sound sophomoric to suggest this, but nevertheless we will – be certain that you keep copies of any documents you sign – they may come in handy). You will get no disagreement from anybody that slogging through legal documents tying you in some fashion or other to a former employer is not much fun. But (as we’ve harped before) there’s also no substitute for knowing the contents of these. It’s always better to find out that there’s a signed agreement in place with somebody before it’s too late.
It’s possible, depending on the type of business under discussion, that the employer will have you agree to a non-solicit of its customers, and sometimes of its vendors, for a period of time following your departure. A non-solicit of a firm’s employees is also extremely common, especially in tech-related fields (no employer wants to lose top engineers or coders to a startup founded by a one-time, and recently departed, colleague – and such opportunities, which frequently come with attractive perks, are often very enticing to a company’s workers, a recognized truism that employers have taken steps to mitigate). A non-solicit provision pertaining to a business’s employees will typically be severe, probably tying your hands as a former coworker with respect to their recruitment for twelve months, and you need to honor the lines in the sand that these restrictions draw in front of you (this applies also to soliciting former co-workers for a secondary entity or on behalf of a secondary entity once you have left an employer). This is an established practice (somebody, a rival perhaps, sends in a former co-worker with a box of cigars or candy or a bouquet of roses or something else, and a lucrative employment offer to accompany it), used to raid worker rolls of companies going back centuries – raiding companies may not even qualify as the direct competitors of an entity, may have nothing more in common than the fact that they share a competitive sector – like technology.
Stay tuned for more helpful tips on how to get yourself and your startup clear and underway.