Leaving Your Employer to Become a Competitor

I occasionally hold office hours a weekly entrepreneurial event here in the Boston area. One issue that gets brought up every time is the issue of leaving one’s day job to start a company that competes to one degree or another with their current employer. These individuals want to know if they can legally do it, as well as what kind of legal risks they’re facing with their employer. If you’re going to leave your job to start a company that competes to one degree or another with your current employer, here are a few issues you should be cognizant of throughout the process.

First, you should know whether you’ve signed a non-disclosure or non-compete agreement with your employer. The agreement may have been a part of the general employment contract you signed when you were hired, or you may have signed a discrete agreement. In any event, having signed an enforceable agreement may limit your ability to start your own, similar company. I’ve previously discussed these kinds of agreements in detail; however, it is important to note that non-disclosure agreements, which may or may not be limited in duration, may prevent you from utilizing information gained while employed by the company that you might otherwise use to get your startup off the ground, such as marketing strategies or supplier/customer/client contact lists. Similarly, non-compete agreements, which generally restrict you from holding similar positions in other companies, may also prevent you from owning or operating competing businesses. However, some employers do make mistakes in drafting or executing such agreements that may render them unenforceable, usually by drafting the agreement too broadly or executing the agreement without valid consideration. If you think an agreement you’ve signed with your employer may be unenforceable, you should definitely consult with an attorney, who can advise you on the costs and risks of challenging a non-disclosure or non-compete agreement and the likelihood of successfully challenging it.

Aside from the non-compete/non-disclosure agreement issue, you should ensure that you are not misappropriating company intellectual property or resources when leaving to start your own company. Two issues that often come up are having previously brought your business idea to your employer (who passed on the idea), or worse, having used company resources to work on your business idea. Employment agreements sometimes contain clauses to the effect that if an employee makes a project proposal to the company (whether or not the proposal is accepted) or works on a project using company resources, then the project becomes the company’s property. Even if you never signed an agreement to that effect, your employer may nonetheless consider your project its property, especially if the project was developed using company intellectual property or company resources, or if you worked on it on company time.

Perhaps the best way to resolve the above issue or any issues that may be caused by your leaving to form a startup in your employer’s industry is to be open with your employer about leaving to start your own business — I know I would feel better about an associate of mine who let me know they were leaving to start their own startup law practice as opposed to only finding out through the trade journals six months later! Of course, you should do so as cordially and diplomatically as possible, being mindful to be thankful for the opportunity to work for your employer and for the knowledge and skills you’ve obtained while working there. One of the oldest and best pieces of business advice is to “never burn a bridge”, and that is true in this situation — you may want to call upon your former employer or a mentor at the company for help or advice as you launch your business, so if at all possible you should leave on the best terms. Another benefit to being transparent with your employer is that it will clear up any questions as to how your employer will feel about you leaving to start a similar company, whether they will be openly or at least tacitly supportive, or will be openly combative about it. In addition, your manager or HR rep can also point out any clauses in your employment agreements that may hamper your plans for your start-up. That way, you know about any legal hurdles you will face from your employer from the outset, rather than being blindsided down the road (and you and your attorney can form a legal strategy to deal with them accordingly!).

Finally, when you do leave your present job, be sure to take nothing with you — certainly no equipment, but also no contact lists, guides, manuals, or anything of that sort. If you do want to keep and use something issued to you during your employment — a particularly useful guide to web programming, for example — be sure to ask before you take. This prohibition also extends to your colleagues — do not try to hire any of your co-workers on your way out. This sounds pretty obvious, but it can be tempting to hire John, your company’s IT guy. You may think John is a brilliant tech guy and would be an invaluable asset to your new startup, but poaching him from the company is the easiest way to ruin your relationship with your now-former employer.

If you’re thinking about leaving your current employer to start a business in the same industry, you should first review any employment agreements you’ve signed to see if they might prevent or hamper your plans to start your own business, or if you may have already assigned your business idea to your employer. Next, be open with your employer about your plans, get a sense of whether your employer will oppose your plans, and try to ensure you leave on good terms and that your employer or a mentor within the company is someone you can call on in the future if you need help or advice. And then finally, when you do actually leave do not take anything from your employer — equipment, resources, or employees.