The startup journey for many entrepreneurs begins while still employed by another company. Often without significant personal resources, an entrepreneur may depend on the income from a “day job” to live and to fund a new business. So, the entrepreneur presses on with his or her idea, with the eventual goal of leaving a current employer once the venture shows sufficient potential.
Such circumstances present important issues that entrepreneurs should consider soberly, however: Are there limits to what you can do for your startup while employed elsewhere? Who owns an invention that you create while employed? After you depart, will your former employer sue you for building your startup around technology that the employer claims you do not own?
For a technology-based startup, these issues are critical to the future of the company.
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Why Be Concerned?
While employed: You may owe fiduciary duties to your current employer. Depending on the facts and circumstances of your situation, your actions could be regarded as unfair competition against your employer. While no blanket rule exits that specifies exactly what you can and cannot do while employed, the more that you do, the greater the risk that your actions will be problematic.
Post-employment: As a general matter, it is not unlawful to compete against a former employer. However, employers regularly require employees to sign agreements containing restrictive covenants that limit the employees’ post-employment activities with respect to working for competitors of the employer, soliciting customers and employees of the employer, and using the proprietary information of the employer.
These agreements also typically contain assignment language regarding employer ownership of employee inventions made during the course of employment. Such provisions frequently distress entrepreneurs, particularly when the technology that is the basis of the new startup is related to that of the former employer.
What to Do?
Proceed cautiously.
As noted, there are no bright-line rules to determine whether your actions while employed are lawful. Any such assessment would require a thorough evaluation of the facts and circumstances of your situation by a professional experienced in resolving these types of disputes.
Analyzing the risks associated with the startup’s intellectual property is even more complex, and is best approached with, at a minimum, an awareness of the factors that may increase the risks of being sued by a former employer. Start with the following:
- Have you signed an Employee Agreement or like instrument?
- Does the agreement contain assignment language?
- If so, how broad is the assignment (i.e., does it cover everything you work on? Are there carve outs? How does the state in which you work generally regard such provisions?)
- Have your requested and received, in writing, permission to work on your technology while employed?
- Have you used employer materials (equipment, facilities, supplies) in working on your startup?
- Have you worked on your startup during your employer work hours?
- Have you used any employer IP for your startup (i.e., code, confidential information, trade secrets)?
- What is the scope of your duties in your current position?
- Is your startup potentially a direct competitor of your employer?
- Does your technology relate to any current or future research and development of your employer?
You should be thinking about the factors above prior to and during your quest to fulfill your startup dream. Trust me — you do not want to deal with a lawsuit from a former employer when your startup is only just emerging; nor do you want to be unable to sufficiently demonstrate clear ownership of intellectual property to a potential investor when funding is imminent.
And before you sign that term sheet, hire your first contractor, or make a significant investment of time or resources into your startup, try to ensure that you have a solid, good relationship with your employer. Because sometimes, personal relationships matter, and those who are mad, sue.
