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Avoiding Trouble: Provisions in Previous Employment Documents that Every Start-Up Company Founder Needs to Review
Posted in Growth
Written by Yokum Taku, a Partner at Wilson, Sonsini, Goodrich & Rosati’s, as part of the firm’s Winter 2008 newsletter
A potential founder of a start-up company needs to review various documents signed with their previous employers in order to avoid unnecessary problems in the future. Most employees have signed an offer letter, confidential information and invention-assignment agreement, as well as other documents such as a stock option agreement. Depending on the company and the employee, other relevant documents might include an employment agreement, an employee handbook, a conflict-of-interest policy, or a severance/separation agreement. These documents should be reviewed carefully for provisions that may inhibit the activities of the future start-up company. Enforceability of some provisions in these documents, such as non-compete clauses, generally depends on the state where the employee is located.
Founders should review the relevant documents for the following provisions and consult with legal counsel:
Confidentiality
All technology companies require employees to sign a confidentiality agreement that prevents employees from using or disclosing employer confidential information except for the benefit of the employer. These confidentiality provisions are usually for an indefinite period of time, as opposed to a finite period such as five years in a typical confidentiality agreement between companies. In any event, most states prohibit the misappropriation of trade secrets as a matter of law, regardless of whether or not the employee signed a confidentiality agreement. Thus, a potential start-up company founder needs to ensure that he or she does not use former employer confidential information in connection with the new company.
Invention assignment
All technology companies also require employees to assign inventions created during employment to the employer. In
(a) the employee has made the invention on his or her own time not using company equipment, and (b) the invention does not relate to the business of the company or did not result from work for the company. However, an employee still may need to notify the company of a non-assigned invention under the terms of the invention-assignment provision.
Some companies may have invention-assignment clauses that require the employee to assign inventions created for a certain period of time after termination of employment, such as from six months to a year. These clauses may be enforceable depending on the state and the facts and circumstances of the situation.
Invention disclosure
Even if an employer does not require post-termination invention assignment, some employers include provisions in standard documents that require the employee to disclose inventions created (or patents filed) for a certain period of time after termination of employment. This is less common and may be enforceable if it is reasonably necessary to protect the company’s business interests.
Non-compete clauses
In many states, non-compete clauses are enforceable if they are reasonable in scope and duration. However, non-competes are generally not enforceable in
Non-solicitation of customers and vendors
Some employment documents also include a prohibition on soliciting the employer’s customers and vendors. In states like
Non-solicitation of employees
Most technology companies require employees to refrain from soliciting employees for a specified term, such as one year after termination of employment. Thus, start-up companies where founders intend to hire their former co-workers need to carefully navigate the bounds of permissible action under these clauses. Please also note that key employees of a company may be subject to fiduciary duties to the company and may be subject to claims of breach of fiduciary duty, fraud, and intentional interference with contract for soliciting co-workers even in the absence of written agreements.
No moonlighting
Some employment documents contain explicit provisions that prevent employees from working on business activities unrelated to their employer, even if it is after hours. This may limit pre-resignation activities of the potential founder.
No conflicting stock ownership or directorships
Some company conflict-of-interest policies prevent an employee from investing or holding outside directorships in other companies. This may limit pre-resignation incorporation of a new company.
Potential start-up company founders need to be aware of these issues and identify them for their legal counsel as soon as possible prior to starting a new company.