The questions I most frequently receive continue to focus on start-up issues, whether new products or technologies. So, in the interests of demystifying some of the legal issues involved with technology start-ups, I’ve decided to address the main topics in a 10-part series on start-up issues. Let’s get started.
One of the first legal questions for the budding entrepreneur is, what did you used to do? I ask this not to determine whether you’ve got the stamina for the start-up life. That may be a good question, but it’s not really for me to ask. Rather, the question is aimed at determining whether you have obligations to your previous employer which might restrict what you want to accomplish in your start-up venture.
These obligations can take several forms. The first step is to confirm whether you had a letter confirming your hiring and setting out the terms of employment, or whether you signed an employment contract, confidentiality agreement, non-disclosure agreement (NDA), or had any other agreement with your employer. The key things you’re looking for are confidentiality, non-compete or non-solicitation covenants, or an assignment of any intellectual property rights you may have acquired as an employee. These covenants can be embedded in any type of agreement, so don’t assume they’re not there just based on the formal name of the agreement. If you do have any such agreement, you’re probably well advised to consult your lawyer as to the scope, and duration, of any restriction.
Even if you didn’t have an agreement with your former employer, that still does not mean you’re completely off the hook. If you were a director, officer or key employee, you may owe fiduciary or “key employee” obligations to your former employer. Unfortunately, there’s no “bright-line” test as to when these obligations apply. Generally, if the employee was a director or officer, or if the business would be particularly vulnerable to the actions of the employee (such as a key salesperson), or if the employee was the company’s primary contact with customers, or had a high level of responsibility for sales or revenues, or had access to critical customer information or differentiating business strategies, then the employee is likely to be found to owe a duty to the employer even after termination of the employment relationship. In this situation, you can still compete with the company, but you can’t do so “unfairly”. That means you cannot use the company’s confidential information, or solicit the company’s customers or employees. And beware, the new employer, and other third parties who might profit from your breach of these obligations, also may become liable. There are strategies for avoiding liability in these situations, but it admittedly can become a little tricky. You should seek legal advice if you find yourself in this situation.
In Part 2 we’ll talk about business structure.
About Jan Lederman:
Jan’s practice is concentrated in the area of corporate and commercial law with an emphasis on transactional work, including mergers and acquisitions, project development, venture capital, private equity investment transactions and public and private debt and equity financings. She has extensive experience in developing innovative development structures and strategically planning negotiations with multiple stakeholder groups. Jan also acts for co-operatives, non-profits and charities and teaches Charity Law at the Faculty of Law, University of Manitoba.
To find out more about Jan or to contact her, click here.
This post originally appeared in Jan’s Biz Law Blog. Check it out here.
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