Florida Small Business Law » Intellectual Property

Startup Risks: Starting a Business While Employed

Shannon DeRouselle — Fri, 08 Apr 2011 15:14:18 +0000

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.

NDA’s – Am I Protected?

Shannon DeRouselle — Fri, 22 Jan 2010 23:12:00 +0000

My neighbor is a good guy. Very smart and ambitious. We discuss things. Recently, as he described his new venture to me, he mentioned that he had been using a Non-disclosure Agreement (NDA or Confidentiality Agreement) that he found on the web. I knew that it was time to add a blog entry on this topic.

Requests for NDA’s are among the most frequent inquiries that I receive. NDA’s are commonly used, normally short in length, and serve the ostensible function of proscribing the revelation of certain information. Most of the time, a client who asks for an NDA is on the right track, since that client is at least considering the handling of important information that has value to either the client or another party.

Sometimes, however, a party chooses to utilize a “form” NDA found on the Internet. This act is not necessarily cataclysmic — I have found useful forms on the net; also, the party may not want to pay a lawyer to draft an NDA.

At other junctures, a party may sign another party’s NDA, perhaps as a result of either an assumption that the NDA covers both parties’ interests, or a simple lack of negotiation power.

Whether you are an actual client, or an ambitious web user, take note: a single NDA template is not appropriate for all circumstances, and to better protect your valuable information, a properly drafted NDA is necessary.

NDA’s are worded differently depending on the intended use of the document. For instance, certain language may be appropriate for discussions with a potential new client, but may not properly address the handling of information when evaluating a potential sale of the company. Similarly, the specific language used in an NDA might vary according to whether you are disclosing or receiving confidential information. Moreover, how the term “Confidential Information” is defined in an NDA can vary widely, as can exceptions to confidentiality obligations, the duration for which such obligations are in effect, and the remedies for breach of the agreement. NDA’s can be very sophisticated.

An NDA is an important step in safeguarding valuable information. Like any contract, however, an NDA is not foolproof and does not guarantee that your information will not be misappropriated or misused. For absolutely security, you must never reveal information at all – not very practicable for business (in fact, sometimes the measured disclosure of information is customary, such as in discussions with VC’s and investors who do not normally sign NDA’s when evaluating potential investments).

My neighbor will be fine: while I have not revealed any confidences, and have received his blessing for this note, the NDA form that he uses is the most restrictive that I have ever seen, and, presumably as a result, no one has yet agreed to sign it.

Small Business and Intellectual Property

Shannon DeRouselle — Thu, 14 Jan 2010 18:50:40 +0000

A few months ago, the multi-billion dollar legal dispute between eBay and the founders of Skype highlighted a legal axiom that is overlooked by small companies all too often: “Own thine intellectual property.”

eBay had purchased Skype for billions but, for some unspoken business reason, did not acquire absolute rights to a core component of the intellectual property behind the Skype technology, which was retained by the Skype founders and licensed to eBay. Subsequently, when eBay tried to sell the Skype business to a group of investors, the Skype founders, who had initially stayed on with Skype after the sale to eBay but eventually left the company, sued eBay for violating the terms of their licensing agreement. Although eBay and the Skype founders ultimately settled their disagreement, the legal embroilment resulted in costly litigation and nearly obstructed eBay’s sale of Skype.

The eBay/Skype anecdote illustrates an important lesson.

Companies often assume that the company owns the intellectual property created by founders, employees, and independent contractors. However, unless the intellectual property developed by these individuals has actually been contributed to the company through an assignment or similar legal agreement, the individual, rather than the company, retains ownership (in the case of an employee, the transfer may be imposed by law depending on the nature of the intellectual property created; nonetheless, it is customary for employees to assign their rights to the company through written agreement).

Small business, albeit on a lesser dollar scale relative to the eBay/Skype incident, frequently encounter similar situations. Who owns the company software? Logo? Business name? Customer lists? Website design and source files? Content? These examples are typical scenarios where a company would be wise to clear up any uncertainties over intellectual property ownership.

Why does it matter?

First, hostage situations (this is only an example!): would your company be affected if your webmaster shut your website down and demanded that you immediately pay $10,000 if you ever wanted to see the website code or applications again? If yes, then work out who owns what before that unlikely plot develops.

Next, clarifying the appropriate ownership of company intellectual property is a big deal to potential investors and buyers, who do not want the value of their asset to be subject to the later actions or claims of a third-party owner of IP. As seen in the eBay/Skype scenario, the Skype founders created significant leverage for themselves — at the detriment to eBay — by retaining ownership of a piece of the Skype technology. While the Skype founders likely walked away with a handsome financial premium, the potential Skype buyer surely contemplated walking away from the deal with eBay altogether.

For the inventor/author/creator: Because there may be situations when a blanket assignment is not appropriate, you must ensure that the assignment that you sign is appropriately limited in scope so as not to include intellectual property that you do not intend to contribute to the company. For instance, you may be developing intellectual property on your own time and with your own resources that should not be the property of the company.