Employment Matters – Making a Clean Break (Leaving Your Employer)
A few important rules of the road when considering quitting your job to form a startup:
Review Employment-Related Agreements/Policies: Employees often execute a variety of agreements with an employing company at the beginning of, and during, an employment relationship. Employees may also explicitly or implicitly agree to be bound by employment policies/handbooks of an employing company. And there are also common law obligations, particularly with regard to confidentiality, that the law imposes on everyone, regardless of whether they have an agreement with their employer or not. These agreements, policies and laws often contain a variety of restrictions on the employee’s activities both during the employment relationship and after termination, and such restrictions may impact (sometimes, significantly) an employee’s ability to form a startup shortly after quitting a job. As a result, any existing agreements and applicable policies need to be collected and reviewed carefully, and in many cases advice of counsel should be obtained, to evaluate the applicable restrictions and determine the risks and potential limitations of forming and operating a startup that may be covered by one or more provisions of any such agreements.
Such restrictions often include:
- Noncompete: Employees are often bound by noncompetition covenants whereby an employee agrees during the period of employment and for a period thereafter (often at least one year) not to engage in any activity that competes with the employing company or a particular business unit of the employing company.
- Confidentiality: Employees are often bound by confidentiality covenants whereby an employee agrees that, at all times during employment and in the future, he or she will not disclose or use any confidential information of the employing company for any purpose other than for the employing company’s business. State common law also protects against a former employee using the confidential information of his or her former employer.
- Nonsolicitation: Employees are often bound by nonsolicitation covenants whereby an employee agrees during the period of employment and for a period thereafter (often one to two years) not to solicit or hire any other employees of the employing company, and not to solicit or engage for any purpose any of the employing company’s customers or vendors.
- Assignment of Inventions: Employees are often bound by assignment of inventions covenants whereby an employee agrees during the period of employment that any invention, idea, technology, etc. related to the employing company’s business and developed by an employee during the period of employment (whether in the office or at home) is owned by the employing company.
- No Moonlighting: Employees are often bound by “no-moonlighting” covenants whereby an employee agrees during the period of employment not to engage in any other business activities, including any activities after normal work hours.
The application of such restrictions may significantly restrict the formation and operation of a startup and/or its ownership of important intellectual property, and litigation over the application of such restrictions can be very expensive and distracting to a new startup and its founding group. It is therefore critical to evaluate such restrictions carefully, abide by such restrictions while still employed (including, importantly, not developing any intellectual property intended for the startup to avoid an ownership claim by the employing company), determine (with the advice of counsel) the best timing for exiting an employment relationship and the best strategy for avoiding litigation over potentially applicable restrictions, and implement necessary changes to the startup’s development, business and operational strategy to avoid (or at least limit) potential conflicts arising from such restrictions.
Do Not Take or Use Trade Secrets of Former Employer: A “trade secret” is valuable information that the employing company (i) keeps strictly confidential, such that it is not generally known or available to competitors or others in the applicable industry, and (ii) receives a competitive advantage from its use and secrecy. Customer lists, processes, techniques, technologies, formulas, devices can all be trade secrets. Even without a confidentiality agreement, unauthorized use or disclosure of trade secrets of an employing company is in most cases prohibited during the employment period and thereafter. So a prospective founder of a startup should not make plans to use, disclose or rely upon trade secrets of the employing company in connection with launching and operating the startup.
Planning Is Acceptable; Actions Often Are Not: While still employed, an employee needs to limit what actions are undertaken in developing a new startup enterprise, particularly when such startup will be competitive with the employing company. A general rule to follow (subject to any applicable contractual restrictions): making plans to develop such a startup is permissible (e.g., market research; business planning; general discussions with potential founders; etc.); taking actions to develop such a startup (particularly one that will compete with your current employer) is often not permissible (e.g., forming the company; developing or marketing the product; launching the website; etc.). Key employees and employees with special skills critical to the employing company will be subject to higher standards when evaluating what actions may or may not be taken (such employees have an implied duty of loyalty to their employer), and such employees should avoid taking any actions that may be detrimental to the employing company prior to terminating their employment relationship.
Do Not Plan On Company Time/Equipment: Separate any startup planning activities from the employing company’s workday, employees and equipment. An employee should avoid engaging in planning activities during the workday, when such employee should be working exclusively for the employing company. An employee should avoid using any of the employing company’s equipment (including the employing company’s computers) for planning activities. And an employee should avoid soliciting co-workers while still employed, even if such employee is not bound by a nonsolicitation restriction.
Be Prepared to Promptly Return Company Property: Laptops, mobile phones, company records, customer lists, confidential information, and any other property or materials of the employing company are exactly that, property and materials of the employing company. An employee seeking to make a clean break and form a startup should not complicate matters by attempting to keep, or delaying the return of, company property. Such actions will only serve to agitate and raise questions at the employing company, which may result in a greater likelihood of litigation over such matters or over potentially applicable restrictive covenants.
Review Equity/Bonus Incentives: An employee should evaluate what rights might be extinguished at or shortly after termination of employment. For example, stock options often expire 90 days after termination and then they are lost forever. An employee should consider what incentives he/she may be giving up depending upon the date of termination and how best to secure such incentive arrangements by delaying termination (for example, in the case of a year-end bonus) or by taking actions to appropriately secure applicable rights (for example, by timely exercising stock options).
Try To Leave on Good Terms: Not necessarily the easiest thing to do, particularly if the startup is going to be competitive, but try you must. An employing company is much more likely to bring claims against the startup if the employment relationship ended on bad terms or if the former employee was deceptive when asked why he/she was leaving and what he/she planned on doing.
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