HOW TO PROTECT YOUR STARTUP FROM EMPLOYERS

I want you to pay attention to this. 

The last thing you need when creating your startup is some other employer of yours or from your past to stir up trouble.

Don't think just because you're a small guy or too big of a guy at your company these issues don't matter. It creeps up in small and large contexts. Not long ago, one of my clients sold their company for hundreds of millions in the medical tech field and wanted to move on and start their next operation, but certain contractual matters had proven incredibly disruptive. It was a pain in the ass.   

At the end of the day--your previous or current employer CAN claim that they own what you're working on. They CAN say that you breached all sorts of duties and this and that. The point is--

They CAN completely screw you over if you're not careful. 

So how do you protect yourself from these kinds of problems? You protect the startup's IP and you make sure there are no conflicts with your current and previous employers. Go down through the checklist below and make sure you're fine. 

Note that all of this is extremely fact-based. And your circumstances might differ in a subtle way that changes the situation. Some of this differs based on your geography. Some courts are more favorable to employers, some aren't. But if you do the things below, you will be setting yourself up for less problems.
 

CHECKLIST ON HOW TO PROTECT YOUR STARTUP FROM EMPLOYERS- SHORTFORM
 

___ 1. DECIDE WHETHER OR NOT TO QUIT YOUR CURRENT JOB
___ 2. PROTECT YOUR STARTUP IP FROM EMPLOYERS

___ a. Pay attention to any invention assignment agreement
___ b. Refrain from certain actions when you create your IP

___ i. Don’t work on the startup IP when you are on your employer's clock
___ ii. Don’t use your employer’s equipment, tools, computers, copiers, office, pens--anything
___ iii. Don’t work on it at your employer’s place of business
___ iv. Don't use your employer's trade secrets to help you develop the IP

Note on contractors

___ c. Take extra precaution if the IP is related to your current employer's business

___ 3. PROTECT YOUR STARTUP FROM YOUR CURRENT EMPLOYER

a. If contracts are in place with current employer

___ i. Look for any non-compete agreements
___ ii. Look for a no-moonlighting clause
___ iii. Look for a confidentiality agreement

___ iv. Pay attention to Texas law

b. If no formal contracts in place with current employer

___ i. Make sure you don't interfere with your current job or performance
___ ii. Be careful of starting a competing business even if there is no non-compete in place
___ iii. Don’t solicit your fellow employees
___ iv. Don’t take materials from your employer right before you leave

___ 4. PROTECT YOUR STARTUP FROM PREVIOUS EMPLOYERS

___ a. See if you are restricted with a no-raid clause
___ b. Make sure you are not bound by a covenant to not compete
___ c. Look back at confidential information agreements with previous employers

 

CHECKLIST ON HOW TO PROTECT YOUR STARTUP FROM EMPLOYERS- EXPLANATION & LONGFORM
 

___ 1. Decide whether or not to quit your current job

I want to address this point real quickly. NO. You don't have to quit your job. The absolute best entrepreneur I've ever worked with, the absolute best of the best I've ever seen, someone turning heads all across the world, didn't quit his job. Now here's the thing--you're not him. You may potentially be at his level. But actually being there and potentially being there are two very different things. So if you need to quit your job in order to make your startup work, that's fine and is perfectly normal. But no, you don't HAVE to quit. 

 

___ 2. Protect your startup IP from employers

Make sure that IP created belongs to your startup and not to some other employer

The IP you create for your startup needs to belong to the startup and not someone else. In fact, it shouldn't even belong to the founder of the startup. It needs to belong to the actual startup--i.e. the entity itself. If it doesn't belong to the startup, there is potential for your startup to blow up--and I don't mean that in a good way.

The fact of the matter is that if you work on your startup or startup-to-be while you are currently employed elsewhere it is CRITICAL that it's clear who this IP belongs to. 

First, let me make clear some things that entrepreneurs have asked me many times and get confused on:

YES: it is possible that your employer can own the IP you create even if you create it on your own time.

YES: your employer can do the same even if you didn't use your employer's equipment.

So what do you do to make sure that the IP created actually belongs to the startup and not the employer?

___ a. Pay attention to any invention assignment agreement

Look at your employment and other agreements between you and employers.

Read them.

Look for something called an invention assignment agreement (or similarly termed provision.)

An invention assignment agreement means that the stuff you create during your term of employment (and sometimes even after employment) belongs to the employer. It gets "assigned" to them.

So what do you do if you signed one of these and you still want to create your IP and work on your startup?

You sway the facts your way. The impact of an invention assignment agreement differs based on the facts. You change your IP to something completely unrelated to your employer. You don't use your employer's trade secrets to help you develop your IP. You don't use your employer's tools. You work on this unrelated IP in your off time. You change your employment. If you do these things, the inventions assignment agreement will probably not hold much weight.  

___ b. Refrain from certain actions when you create your IP

Even if you didn't sign any invention assignment agreement, your employer can claim that the IP you created actually belongs to them.

Yes. You read that correctly. Don't think you are golden just because there's no invention assignment agreement. 

So what are the steps you should take to keep this from happening?

___ i. Don’t work on the startup IP when you are on your employer's clock
___ ii. Don’t use your employer’s equipment, tools, computers, copiers, office, pens--anything
___ iii. Don’t work on it at your employer’s place of business
___ iv. Don't use your employer's trade secrets to help you develop the IP

___ c. Take extra precaution if the IP is related to your current employer's business

Be careful if the IP is related to your current employer’s business: even if you don’t develop the software during your working hours, nor use your employer’s tools in creating it, if the software is related to the employer’s business (including anticipated development and research), then your current employer may say that they own your startup's IP.

How do you take extra precaution? There are many ways; sway the facts in your favor--change your employment; change the IP. 

Note on contractors: A quick note here since I am often asked about this. Generally IP created by a contractor does NOT belong to the hirer. If you are a contractor or if you hire a contractor and IP needs to belong to one party or another, make sure you get this in writing to be absolutely clear. This is often a ripe area for litigation. 

The reason that this is ripe for litigation is in part due to the fact that the determination of someone being a contractor or employee is a grey-area. See this article for more information regarding employee/contractor status: https://www.startuplegalstuff.com/how-to-hire-people-checklist/

 

3. Issues regarding your current employer

Pay attention to non-competes and collateral issues regarding your current employer.

Most of the issues between you and a current employer are going to revolve around the idea that you are not permitted to work on a different venture. 

Your current employer can bar you from creating your startup. Similar to analyzing IP issues, you need to look at the contracts you have with your employer and to issues beyond any contract. 

a. If contracts in place with current employer

Here's what to look for. 

___ i. Look for any non-compete agreements

A non-compete agreement may be in place. Non-compete agreements are between employer and employee, and prohibit competition.

I deal with these all of the time. You need to be careful if you signed one of these. 

So what do you do if you signed one? See what type of non-compete it is. If it's a blanket, all-encompassing non-compete then you might, ironically, be more able to squiggle out of it. Courts don't like blanket non-competes. Non-competes should be reasonable and limited in geographic scope or limited in time. 

___ ii. Look for a no-moonlighting clause

A no-moonlighting clause prevents you from working on business activities unrelated to your employer even if its on your own time.

These are less common than non-competes, but they are something to watch out for. 

___ iii. Look for a confidentiality agreement

A confidentiality agreement protects an employer from an employee using or disclosing confidential information (e.g. trade secrets) except to the benefit of the employer. 

Make sure whatever you are working on for your startup does not use confidential information of the employer. 

___ iv. Pay attention to Texas law

A lot of this law/legal material is state specific. Texas law is definitely more strict on these kinds of agreements than other places, but generally by no means is Texas the most strict. Also, especially in Texas, be careful of these kinds of agreements that last in perpetuity. When a confidentiality agreement or NDA or similar runs forever you may have a situation where one party may terminate it at will. A corporate lawyer/startup lawyer in Texas can help you with these kinds of issues. 

b. If no formal contracts with current employer

Even if there are no formal contracts in place, do the following

___ i. Make sure you don't interfere with your current job or performance. 

If you are making plans and this and that for your startup, that's great. But it should never interfere with your current job or performance. You are opening yourself up to a host of problems if you do that. 

___ ii. Be careful of starting a competing business even if there is no non-compete in place

Certain employees owe duties to their employer regardless of what's on paper. Don’t start a competing business to your employer if you are a high level employee even if there is no employment agreement. You can make plans to start a competing business, but make sure to not actually start that competing business. If you're starting a non-competing business, that's going to be fine. 

___ iii.  Don’t solicit your fellow employees.

You are inviting trouble if you solicit fellow employees. You can tell them of your plans, but nothing more than that.

___ iv. Don’t take materials from your employer right before you leave. 

Don't take trade secrets or anything of the sort. Avoid trouble from the get-go. Be careful of the materials you take right before you leave.--even if it's your stuff. Be cautious of transferring files from a work computer. Even if the files are just family photos or something along those lines. The administration may just see “File transfer Date, “File Transfer Date,” etc. 

 

4. Issues regarding your previous employers

After you've left your previous employer, you might still be on the hook for certain things. Issues will generally arise as a result of contracts that you had in place while you were employed that keeps you on the hook even after you've left your employment. Other issues and drama might come up after you've left employment too--but a lot of that is going to be as a result of things you did WHILE you were employed elsewhere, not what you did afterwards.  

So look at the contracts:

___ a. See if you are restricted with a no-raid clause.

This prevents you from soliciting your former colleagues to come work for your startup company. Additionally, don't solicit your employer's clients/customers. 

___ b. Make sure you are not bound by a covenant to not compete

This can keep you from competing with your employer even after you have left your employment. Covenants to not compete need to be reasonable in scope.

___ c. Look back at confidential information agreements with previous employers

Make sure whatever you are working on for your startup does not use confidential information of an employer. 

 

Summary: Here's the deal--it would really be obnoxious if some other employer raised trouble for you and your startup due to IP issues and employment law issues. So protect your startup. Limit drama? Well, that's another issue entirely. But you can limit legal problems for your startup. So: 

a. Go through the checklist above. 

b. Take care of those things, put them in your past, and go focus on your startup.