Before you take the jump to your new venture!

March 14th, 2011  |  Categories: Uncategorized

 We’re back! After a month hiatus, I am happy to send you this new issue of Pointers. I am also pleased to report that we are nearing 1500 subscribers. Thanks for all those forwards and for the great feedback!

I gave several talks in the past few weeks to groups of recently minted or soon to be entrepreneurs and two things struck me. The first one is that many people who are still working full time at a company are building a startup on the side and don’t seem willing to leave their current job until their new baby is “ready”, whatever that means.  Those  might want to take the Harvard entrepreneur test before leaving, as it suggest a rather low tolerance to risk, which is not exactly a trait associated with startups.
The second thing I find troubling is that many don’t fully realize that they may be either violating their current employment agreement or spending time and energies after hours building something that their current employer may end up owning. Same thing goes by the way for people who just recently left their job and are preparing to launch their new company.
Nowadays, most people who work for someone else have some variation of an employment or contractor’s agreement. These agreements invariably contain certain provisions that limit what the person can or cannot do during and after his/her employment. In addition, there might be some other strings attached to a current of former employee through a separate NDA, a stock option or RSU plan, the company’s employee handbook, a separation agreement, etc.
 The most commonly found clauses are listed below and might require some legal review so that you don’t end up i) doing something you were not supposed to do in breach of your contractual or fiduciary obligations, or; ii) with some great technology and/or IP that will revert to your former employer. Who’s going to care, do you ask? Well, investors for ones will definitely probe this aspect during the pre-funding due diligence. Potential acquirers will as well. Unfortunately,  this is not something you’ll be able to fix easily -if at all- after the fact. So founders beware!

Moonlighting.  If you’re still employed, your employment agreement may contain explicit provisions that prevent you from working on business activities unrelated to your current employer’s, irrespective of conducting those after hours. This may limit your ability to gradually transition to the new venture while you’re still employed.

Confidentiality.  This is the most common obligation and it may also arise outside an employment relationship each time someone enters in to a written or implied Non-Disclosure Agreement (NDA). The obligation to keep information confidential (and not use it) can run for a fixed term or for an indefinite period. In either case, it applies to post-employment situations and potentially as long as the information received remains confidential. In the unlikely scenario you don’t have any such clause in your agreement, most state laws regarding trade secrets will supplement by making it illegal to use any such confidential information with your new company.
Invention assignment.  If you were employed by a technology company, there is a very good chance your agreement also requires you to assign inventions created during employment to that company. In most cases, this provision applies regardless of where and when the invention was conceived (i.e. no “weekend” exception) and it may cast a wide net and include any development or research area that the company currently is or even anticipates to be in.  Some jurisdictions (WA and CA for instance have enacted some regulatory exceptions to limit those clauses and the jurisdiction you work in may have as well, but the rule of thumb is that you should never assume that this doesn’t apply to you before confirming with your attorney. And even if it doesn’t, you may still be required contractually to notify the company about an invention made outside of the workplace and be in breach if you didn’t.  Finally, assignment provisions usually contain some “carry-over” language for inventions conceived within up to six (6) months to one (1) year following the termination of the employment. This is worrisome as it usually coincides with the most crucial stage of a startup when it lays its technological foundation.

Invention disclosure. Even in the absence of a post-termination invention assignment provision, many employers will require you to disclose inventions created (or patents filed) for a certain period of time after you left. This is to monitor and insure that former employees do not make an invention during their employment and resign from the company so that they can then commercialize it for their own benefits. Many state laws (including CA and WA) have codified this as an acceptable practice.
Non-compete clauses.  In most jurisdictions including WA state, non-compete clauses are enforceable if they are reasonable in scope and duration. Even in California where non-compete are generally considered non-enforceable, this is not an absolute rule and a non-compete can apply to certain conditions, especially and if tied to a sale of business or stock.  Therefore, the location of the former employer and startup, the divesture of assets and the place where the founder will actually work can all impact the applicability of a non-compete and should be reviewed carefully by legal counsel before starting a new business or hiring new employees.

Non-solicitation of customers and vendors. Many  employment agreements also include a prohibition on soliciting the employer’s customers and vendors.  Those are usually enforceable except in some jurisdictions (like CA) where they may be considered a restraint on trade. Note than in most cases, a general solicitation to a group (e.g. mailing list) will not be considered as a breach.
Non-solicitation of employees. Similarly, many technology companies prohibit departing employees from soliciting their former co-workers in order to lure them to their new venture, generally for up to  one year after termination of employment. Since many startups tend to be formed by former colleagues and the first hires are often people they already worked with, this may feel very counter-intuitive to many and  must be handled very carefully to avoid triggering accusations of “poaching”.  Even absent a written agreement to that effect, those obligations are often considered to be among the fiduciary duties of a departing employee.

Work visas. If you or one of your co-founders came to the US under a work visa (e.g.  HB-1,  NAFTA, etc.), there is a good chance your visa is tied to your current (or former) employer and that leaving your job essentially makes you lose your “sponsor”. This can lead to dire consequences, including immediate deportation of you and your family back to your country of origin. If you are not a citizen or a permanent resident, you should check with an immigration attorney before leaving your current job!

No conflicting stock ownership. Finally, you may be prohibited from owning more than a very small stake of common stock of any company that is deemed to be competing with your employer. While this doesn’t really impede your long term plan or your ability to invest in companies, it potentially conflicts with the incorporation of the startup as long as you are with your current employer.

Conclusion. If any of this makes you feel like you never want to leave your cushy job, maybe you don’t even need to take the Harvard test… However, don’t forget that people move in and out of jobs every day and the sky doesn’t fall on them. Most obstacles can be avoided by understanding your contractual and fiduciary obligations and acting ethically.  In doubt, never hesitate to consult with an attorney as it should usually no more than an hour for a competent counsel to review a typical employment agreement and provide you with the proper guidance. Starting your own company may be the most exhilarating thing that has ever happened to you; just make sure your ex-boss doesn’t feel the urge to come crash in your party! 

 Disclaimer: Please note that this newsletter is for educative purposes only and does not constitute legal advice. It should not be relied on to make business or legal decisions, since each state has different laws, each situation is fact specific, and it is impossible to evaluate a legal problem without a comprehensive consultation and review of all the facts and/or documents at issue.

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