Imagine having a great product that is created and honed in your company for years potentially walk out of your office unrestricted. This same great product could end up in the headquarters of one of your competitors when there are no protections set in place. The fear of losing talent and ideas is a very real concern for all employers, including startups. Accordingly, there has been an increase in usage of non-compete agreements by employers in all sectors to combat the potential loss of valuable confidential information and trade secrets.

Non-Compete Agreement Considerations

Employers must consider whether a non-compete agreement is necessary and narrowly tailored enough to stand up to judicial review and the challenge of future employees. The best drafted non-compete agreements are narrowly tailored to the information being protected and limit the restrictions placed on employees.

Startups are in a unique position when utilizing a non-compete agreement. While a non-compete agreement can protect the startup from the release of valuable information when an employee leaves, the non-compete agreement can also act as a deterrent or impediment to attracting employees. Potential employees may find a non-compete agreement restrictive in nature.

A non-compete that provides for an employment restriction for a short period of time (i.e., under two years), limited scope of focus of employment (i.e., only competitor employers and similar job position), and limited geographic scope could still substantially limit the movement of employees. Employees may be reluctant to work for a company that restricts their future movement. Additionally, employees could attempt to negotiate monetary compensation to sign a non-compete or request removal of the provision altogether.

Public policy also supports the mobility of workers in difficult job markets. The enforceability of non-compete agreements is determined by state law and there is not a consensus regarding the enforceability. For example, California has forbidden the use of non-compete agreements in most circumstances and other states have discussed limiting the use of the agreements as well. A startup should have an attorney evaluate the applicable law that governs its non-compete agreement.

Alternatives to Non-Compete Agreements

There are other provisions that could be used in an employment agreement that can govern the protection of an employer’s confidential information and trade secrets. For example, nondisclosure agreements can protect trade secrets of employers and confidential agreements can protect employers from the release of confidential information by employees. Both of these agreements can also be in effect after the conclusion of an employment relationship. Both nondisclosure agreements and confidential agreements are seen more favorably by courts because they do not restrict future movement of an employee.

Final Thoughts

Startups need to balance the advantages and disadvantages of incorporating a non-compete agreement into its employment agreement. Startups should also determine whether employees that they hire are still subject to non-compete agreements and the legal consequences of employing someone who signed a non-compete agreement.