Key Considerations When Contemplating the Launch of Your Startup
When founders begin contemplating the launch of their technology startup, thought should be given to a variety of considerations, especially if one or more of the founders are currently employed at other technology companies. Before diving head first into that new venture, it is wise to take the time to gather your agreements with your current employer (including any employee handbooks or company policies) and consider what obligations you might owe your current employer. If you jump into your new venture without giving proper thought these obligations, your current employer could end up owning all of the intellectual property developed by your new venture without you even knowing it.
Review Current Agreements with Employers
Most technology companies will have their employees sign an offer letter and enter into some form of confidential/proprietary information and invention assignment agreement. If stock options were granted, then there will likely also be a stock option agreement. Other documents and agreements that will govern the employer/employee relationship might be an employment agreement, or a company handbook. If you have already left your current employer, you might also have signed a termination or separation agreement. Before launching your startup, you should gather all of the relevant documents governing your relationship with your current (or former) employer, and look for any provisions concerning confidentiality, invention assignment, non-competition, and non-solicitation. It is critical that you are familiar with the terms of these provisions and understand how they impact you and your budding company.
Confidentiality. It is standard practice that nearly all technology companies require their employees to enter into a confidentiality agreement upon hire that prohibits the employee from using (except for the benefit of the employer), or disclosing to third parties, confidential information about the employer. These confidentiality provisions typically run for an indefinite period, unless the confidential information has been disclosed to the public by no fault of the employee. In order to avoid breaching this provision and running into potential legal issues, it is vital that you are not using the employer’s confidential information in connection with your contemplated startup.
Invention Assignment. In addition to the confidentiality provision, another industry standard with technology companies is the inclusion of an invention assignment provision somewhere in the suite of agreements that all new hires sign. Sometimes this provision is located in a separate Proprietary Information and Invention Assignment Agreement, or sometimes is might be included as a provision in an offer letter or employment agreement. A typical invention assignment provision looks like this:
“I will promptly make a full written disclosure to the Company, will hold in trust for the sole right and benefit of the Company, and hereby assign to the Company, or its designee, all of my right, title, and interest (including all related intellectual property rights) in all Inventions that I create during the period of time I am in the employ of the Company (“Company Inventions”). In addition, all original works of authorship that are made by me (solely or jointly with others) within the scope of and during the period of my employment with the Company and that are protectable by copyright are “works made for hire,” as that term is defined in the United States Copyright Act, and in accordance, the Company will be considered the author of these works.”
In Washington, there is a statutory carve-out to these provisions and a notice requirement at RCW 49.44.140. This statute provides that an employer’s invention assignment provision cannot apply to any inventions developed by an employee if no equipment, supplies, facilities, or trade secret information of the employer was used in the development of the inventions, and the invention was developed entirely on the employee’s own time, unless: (a) the invention relates (i) directly to the business of the employer, or (ii) to the employer’s actual or demonstrably anticipated research or development; or (b) the invention results from any work the employee performed on behalf of the employer. Even if the invention qualifies for the statutory carve-out, many companies include in their standard employment agreements that employees must notify the company of any inventions they have created that fall within the statutory exception.
Non-Competition and Non-Solicitation. In most states, non-competition provisions are enforceable as long as their scope and duration are reasonable (a facts and circumstances determination). With a few very narrow exceptions, most “reasonable” non-competition provisions are valid in Washington. A typical non-competition and non-solicitation provision looks like this:
“I will not, during and for a period of 12 months after the end of my employment with the Company, whether my termination is with or without good cause or for any or no cause, and whether my termination is effected by either the Company or me, directly or indirectly, for myself or any third party other than the Company:
(a) provide services of any kind for any business (within the geographic area specified below) in connection with the development, manufacture, marketing, or sale of any product or service that I worked on in any capacity or in connection with which I had access to Confidential Information at any time during my employment with the Company, if the business’s product or service (i) competes with any product or service sold or provided by the Company, (ii) competes with any product or service intended to be sold or provided by the Company at the time of the termination of my employment with the Company or (iii) competed with any product or service sold or provided by the Company at any time during my employment with the Company;
(b) solicit sales from any of the Company’s customers for any product or service that (i) competes with any product or service sold or provided by the Company, (ii) competes with any product or service intended to be sold or provided by the Company at the time of the termination of my employment with the Company, or (iii) competed with any product or service sold or provided by the Company at any time during my employment with the Company;
(c) entice any vendor, consultant, collaborator, agent, or contractor of the Company to cease its business relationship with the Company or engage in any activity that would cause them to cease their business relationship with the Company; or
(d) solicit, induce, recruit, or encourage any of the Company’s employees to leave their employment, or attempt to solicit, induce, recruit, encourage, or take away Company employees.”
You’ll notice that this provision prohibits the employee from providing services for any business that competes with any products or services sold or intended to be sold by the employer, or that were sold by the employer while the employee worked for the employer, as well as prohibiting the employee from soliciting sales for competing products from the employer’s current customers, enticing any of the employer’s vendors from ceasing their business relationship with the employer, and from enticing any of the employer’s other employees from terminating their employment with the employer. Startup founders should pay special attention to these provisions in their agreements with their current or former employer, and understand the scope of such provisions in order to ensure that they don’t breach these provisions by launching and promoting their startup.
Limit Activities Prior to Resigning from Employment
Because typical invention assignment provisions provide that intellectual property created by an employee (unless otherwise carved out), immediately and automatically is assigned to the employer upon its creation by the employee, it is important that you limit your activities in connection with your startup while you are still working for your employer. This means that you must avoid using equipment, time, know-how, or other resources of your employer in connection with the new startup. At a minimum, any work performed in connection with the new startup should be performed away from work and without any employer provided resources (including employer-provided laptops, computers, or smart phones).
The launching of a new company can be a very exciting and chaotic time, and many entrepreneurs dive in without taking the time to analyze how their obligations to their current or former employer may impact the new business. It is important to make sure you have all of these obligations sorted out, especially with respect to intellectual property rights. You will be required to convince sophisticated investors, and their lawyers, that the new venture owns all of its intellectual property. Any lapses or potential disputes over ownership will need to be disclosed and could lead to some very difficult questions from potential investors (if not completely turning them off to the idea of investing in your company). For these reasons, taking the time to analyze the provisions discussed above in your employment agreements before plunging into the new venture could be one of the most important things you do.