I am returning to my long neglected blog and starting a series about legal issues encountered in forming a new business.

I will start with a post about concerns the founder of a new business should have before leaving his or her job and continue posts through one about the financing of the new business. I will place emphasis on formation of a technology driven start up.

What then are the issues the new company’s founder must consider prior to quitting his or her job?

  1. The founder, no doubt, had to sign or became subject to a number of agreements with his or her current employer. These agreements may be contained in a single contract, separate contracts or in an “employee handbook.”  Wherever contained, they must be carefully reviewed.
  2. Non Disclosure Agreements—NDAs. The founder probably signed a non disclosure agreement with the employer.  Such agreements generally prohibit the use or disclosure of the employer’s confidential information.  The founder must be careful not to have even the appearance of appropriating confidential information because, if in fact there is evidence of misappropriation, litigation by the employer can move to quickly shut down the new enterprise.  NDAs take various forms.  In certain agreements, making a determination as to what, in fact, is confidential information may be difficult.
  3. Misappropriation of Trade Secrets. Wholly apart from the foregoing agreements, the employer may get injunctive relief and/or damages for “misappropriation of trade secrets.”   To prevail, the employer must show that there is in fact a trade secret, that the employer took reasonable steps to preserve it and that the employee used improper means in breach of a confidential relationship to get and/or use the trade secret.  In addition, there may be criminal prosecution for the misappropriation of trade secrets.
  4. Non-Competition Agreements. Many employment agreements contain non-competition agreements. Non-competition agreements are currentlyenforceable if they are necessary to protect the “legitimate business interests” of the employer and if they are reasonable in geographic scope and in time of enforcement.  Courts have held that non-competition agreements that were designed simply to protect the employer from ordinary competition did not serve the aforesaid “legitimate business purpose,” and are thus unenforceable.  I say these agreements are now “currently enforceable” because there is pending legislation to drastically curtail the effect of non competition agreements.  Attempts, however, by the Massachusetts legislature to limit the scope of non competition agreements[1]have met with no success (see my posts of August 2, 2016, June 15, 2015, September 14, 2013 and December 14, 2011, which discuss the merits of some of those proposals). In the event the founder is subject to a non competition agreement, he or she must carefully analyze the agreement to determine whether the founder and the new business are subject to its prohibitions and, if so, whether the employer can enforce the agreement.
  5. Non Solicitation Agreements. The founder may also be subject to agreements preventing solicitation of customers, vendors or employees, etc. of the employer.  Care must be taken to avoid running afoul of these agreements when staffing or ramping up a new business.
  6. Assignment of Invention Agreements. Many employment agreements contain a provision requiring assignment to the employer of know how and inventions.  Some of these agreements may even provide that employees must disclose futureinventions developed for a certain time after termination of employment.  Any know how, invention or process, etc. to be used in the new business should be carefully examined by an IP lawyer to determine whether such an agreement will be breached.  This will be crucial to the success of future funding of the business because ownership and protection of the new company’s intellectual property will be carefully scrutinized by any funding source.
  7. Prohibition of Outside Activities Agreements.Certain agreements prohibit work on outside business activities during business hours, or prohibit outside activities, period.   If it is determined that such an agreement is effective, the founder must find a way to deal with this prohibition.  Even if no such agreement exists, the founder should be careful.  Work should be undertaken on a new business while in the employ of another only after seeking the advice of an attorney.
  8. Other Restrictive Agreements. Employers are creative when attempting to protect confidential information and trade secrets and, of course, when attempting to stifle competition.   The types of devices are limitless and an employer’s otherwise innocuous clause or agreement may give rise to serious consequences in the new enterprise.  Care and thoroughness pay off here.
  9. Many employment agreements require return of the employer’s property. Prior to the founder’s exit he or she should carefully examine files, plans, equipment, hard drives and other retention devices for the employer’s property.  Even an inadvertent retention, if discovered (and it will be!), may result to the founder’s detriment in a law suit by the former employer.
  10. Finally, on exit from the employer, the exit or severance documents should be carefully looked at to make sure that the employer did not add additional agreements that might affect the founder’s new business. A severance payment, for example, may be linked to a non competition or non solicitation agreement.  Prior to leaving, the founder of the new business should also attempt to maximize his or her benefits, such as vacation time, sick time, stock options and the like.

Plan carefully your exit.

 

[1]          The current bill couples the limitation on the scope of non competition agreements with the Uniform Trade Secrets Act.