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Key Takeaways
- A non-compete arrangement prohibits a former employee from working for or becoming a market rival. It is executed when the employer-employee relationship ends and the employer wants to prevent the former employee from poaching customers or using knowledge obtained from their previous job. A non-compete agreement remains in place for a specific time period.
- It might be difficult to write a legally binding non-compete agreement to include in your employment agreements since doing so means reaching a compromise between safeguarding your company's professional development goals and allowing the former employee to continue working once they have left your startup.
- A non-solicitation agreement is a contract that controls an employee's ability to solicit clients of your startup after they have terminated employment. Under the law, the term "solicit" can have a wide range of meanings. In general, it entails contacting existing consumers in order to encourage them to conduct business with a new or rival startup.
- Survival clauses found in most contracts are a treacherous path to take. A survival term in an NDA, in particular, can result in many hours of contract analysis and exhausting preparations for a prolonged legal struggle.
- When seeking financing, searching for possible business partners, acquiring new clients, or hiring important staff, sharing information is critical. Non-disclosure agreements have long been the legal foundation for maintaining confidence and preventing important information from leaking out to where it may jeopardize the profitability of the startup.
What is a Non-Compete Agreement?
A non-compete agreement prohibits a former employee from working for or becoming a market rival. Non-compete agreements are active for a specified period of time.
When are non-compete contracts executed?
Non-compete contracts are implemented when an employer-employee relationship ends and the startup wants to prevent the individual from competing against it at their next workplace, whether it's by being employed by a competitor or by launching a startup in the same sector (and potentially hiring your employees to leave with them). Contractors and independent contracts who work for startups are often asked to sign non-compete agreements in order to protect proprietary information.
Founders could also pursue non-compete agreements to prevent former employees from disclosing confidential/sensitive information regarding operations, clientele, users, formulae, pricing, strategies, salary, techniques and practices, ideas, future products, or public affairs and marketing strategies.
What is a Non-Solicitation Agreement?
A non-solicitation agreement is a contract that restricts a former employee's ability to solicit clients of your startup after they leave. After leaving their present job, the former employee must generally agree not to solicit your startup’s clients for a set amount of time. Under the law, the term "solicit" can have a wide range of meanings. In general, it means that your former employee cannot contact your existing clients in order to encourage them to conduct business with a new or rival startup. Non-solicitation agreements can be beneficial to a variety of startups. Many startups, for example, devote time, capital, and resources to grow their client base, as well as allocating significant assets to keep their customer list private. Therefore, these startups would most probably want to prevent employees from obtaining access to client lists, quitting their job, and then serving those clients at a new or rival firm.
Non-solicitation contracts, however, are not always enforceable. A non-solicitation agreement for a startup registered in Florida, for example, must typically pass two criteria:
- To begin with, the startup must have a valid business reason for implementing the non-solicitation agreement. Protecting current client relations or sensitive information (e.g., the startup’s trade secrets) are two such examples.
- Secondly, the non-solicitation contract's “duration” and “scope” must be fair. The term "duration" refers to the length of time that the contract spans, such as one year, five years, etc. The geographic region it covers (e.g., the city, the county, the entire state, etc.) is referred to as its “scope.”
The unique facts and circumstances of the startup’s industry and market will determine whether its non-solicitation contract satisfies this two-part test.
What is a Survivable Contractual Relationship?
A legal connection between two or more parties is defined by the following:
- The pitching of a proposition
- Acceptance of the offer
- A fair point to ponder (legal and valuable)
The existence of a contractual connection does not exclude it from being enforced or voidable. Relevant laws cover contractual relationships in the context of employment relationships.
Survival Clauses
Survival clauses found in most contracts are a treacherous path to take. A survival term in an NDA, in particular, can require many hours of contract analysis and exhausting preparations for a prolonged legal struggle for the employees and the receiving party (the party that receives sensitive information from a disclosing party).
Why is this the case?
This is because disclosing parties frequently utilize one-sided survival words and clauses. This strategy has worked for certain disclosing parties; others, however, have found that the defensive legal expenses were more than the actual value of the case. A survival term, sometimes known as a “survival clause.” is a condition in a contract that states that terms/provisions, if any, will stay in force after the contract has been finalized and the contract's requirements have been satisfied.
Survival terms are frequently required due to the structure and content of an NDA. When proprietary data and other copyrighted material are exposed for recruitment, acquisitions, mergers, collaborations, product design, or other reasons, the data may need to be kept confidential long after the partnership has been terminated.
The language in survival provisions is drafted specifically to the nature of the partnership between the parties and addresses what information is being released and for what reasons.
General survival
Some NDAs are relatively general in nature and merely state that any logical clauses that should survive the expiration of the agreement will do so. The specifics are frequently left to the discretion of common law standards.
That's not to suggest that it won't work; this is simply a different way of phrasing it. You might not want to use a broad survival phrase for some of your more sophisticated business agreements or partnerships that aren't as strong. So when can you use it?
You can employ a generic survival provision if:
- Your NDA is basic
- Your business arrangement is fairly simple
- The conditions of the protected information are straightforward
Survival by section number
Other NDAs and their survival provisions will be more detailed, indicating that certain elements of the agreement will continue to apply even after the agreement is terminated. These kinds of survival clauses usually specify the provisions by section number or indicate in some other way which parts of the NDA are still in effect.
When your NDA is long or complicated, these sorts of survival clauses come in handy since certain sections may require specific survival conditions, while others will obviously need to cease with the contract's termination.
Get comfortable with non-compete agreements
Non-compete agreements initiated by your startup must be legitimate and enforceable. It might be difficult to write a legally binding agreement to include in your employment agreements since it necessitates reaching a compromise between safeguarding your startup's professional development goals and allowing the employee to continue working after the employer-employee relationship has ended. You need to safeguard your startup’s best interests without putting yourself at risk of future lawsuits by signing an unduly restrictive non-compete agreement.
Non-compete agreements are not governed by any broad federal regulations in the U.S. Rather, the laws governing employer-employee agreements differ from state to state. Some employers are startled to learn that although a few states might welcome non-compete agreements, others are vehemently opposed to them. This may be a particularly serious issue if a founder moves into a new state without first researching the state's employment regulations and gauging the enforcement of non-compete agreements.
For the non-compete contract to be enforced by the courts if the former employee disputes it, the document must specify what the employee is prohibited from doing, for how long, and in what geographical area. What is considered acceptable for these specific provisions is determined by the industry, the kind of business, and whether or not enforcing the non-compete contract will lead to public harm (e.g., tainting the startup’s image).
How can you protect your business and employees at the same time?
Founders who are considering including non-compete clauses in their employee contracts should assess how effective these agreements would be in protecting the startup. If there is a real risk that important team members might steal secret business knowledge and share/sell it to a rival, then implementing a non-compete agreement would be wise.
However, startups must recognize that some individuals represent a very low danger of disclosing private information and may not require a non-compete agreement, particularly if they are never exposed to confidential company information.
Startup founders frequently need to communicate confidential or sensitive information to third parties. When seeking financing, searching for possible business partners, acquiring new clients, or hiring important staff, sharing information is critical. Non-disclosure agreements have long been the legal foundation for maintaining confidence and preventing important information from getting out to some place where it may jeopardize the startup's profitability.
Secret recipes, proprietary formulae, sales and marketing strategies, financial information, and manufacturing methods are all examples of information that may necessitate NDAs. Similarly, client or marketing contact details (such as phone numbers, email addresses, etc.), non-public accounting statistics, or any particular aspect that distinguishes one startup from another are all examples of protected information. A startup seeking funding from venture capitalists or other kinds of investors, for instance, may be concerned that their brilliant concepts could be stolen in exchange for an investment. Such “idea theft” is legally prohibited by having a signed NDA. In fact, it might be quite difficult to establish that an idea has been stolen without a signed NDA.
First, double-check that you have the right template. We'll focus on "unilateral NDAs" because they're the most prevalent type of NDAs. Here is a free template of a unilateral NDA (along with some other types of NDAs).
Summary
A non-compete clause, also known as a "covenant not to compete" in contract law, is a condition where one party commits not to enter or establish a similar profession or trade in competition with the other. Non-compete clauses are referred to as "restrictive covenants" by some courts.
In the context of the legal system, non-solicitation involves an agreement, usually between an employer and an employee, prohibiting the employee from using the startup's clients, customers, or contact lists for personal benefit after leaving the company.
A survival term, also known as a survival provision, is a clause in a contract that states which terms or provisions, if any, will remain valid after the deal has been fully executed and the agreement's conditions have been met. Survival terms are frequently required due to the structure and contents of an NDA.
A non-disclosure agreement (NDA) is a legal structure that safeguards sensitive and secret information from being unfairly disclosed by the person/entity who receives it. These documents are used by startups to guarantee that their ideas won’t be stolen by the individuals or entities with whom they are engaged in negotiation or discussions. This also applies to the startup's employees, consultants, and independent contractors. Anyone who violates an NDA will face litigation and fines in accordance with the estimated amount of the lost earnings. It's possible that criminal charges could be filed. NDAs can be unilateral, requiring just the recipient of the information to remain silent, or bilateral, requiring both parties to agree not to discuss sensitive information with unauthorized third parties.
Learn more with us
- Confidentiality agreement vs. non-disclosure agreement
- Founder's agreement template
- Employment non-disclosure agreements
- Independent contractor non-disclosure agreement
- Learn more about accounting for startups
Access more guides in our Knowledge Base for Startups.
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If you're looking for help with understanding non-compete agreements, non-solicitation agreements, or survivable contractual relationships, get in touch with us.
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