It is said that “In the spring a young man’s fancy lightly turns to thoughts of ... his equity award.” (Apologies to Tennyson). An issue that has arisen more than once as we draft and revise award agreements this year is the prevalence of – and whether to include – restrictive covenants (e.g., non-compete, non-solicit, non-disclosure) in equity award agreements. I have written on this subject several times over the last 10 years (restrictive covenants linked to compensation, I mean – not love). 

Regarding prevalence, recently we were unable to locate a survey on this (presumably by a consulting firm?) on the internet.* Based on experience with clients and frequent discussions with the other leading executive compensation practitioners, I estimate that more than 50% of companies outside of California include restrictive covenants in their equity awards to some executives. Some companies simply make the covenants part of their form agreement. Others restrict application to officer employees and others who could do harm (e.g., tech, operations, strategy, or sales folks), even though not necessarily highly paid.

As regular readers will know, the reason for this is that the courts are much more likely to enforce a restrictive covenant, especially a non-compete, when the remedy for breach is only the loss of compensation. Courts are loathe to enforce a provision that prevents a resident (of their state) from earning a living in his or her chosen profession. However, when the provision gives the former employee a choice of (a) working for a competitor and forfeiting severance, equity, or non-qualified deferred compensation or (b) keeping the compensation but not competing, most courts will enforce the provision (this is known as the “employee choice doctrine”).