Before You Build A Startup On The Side, Reread Your Employment Agreement

The paperwork you signed on your first day at your current job may already claim part of the company you are planning to start. Most people skim it, sign it and forget it. Founders who build on nights and weekends cannot afford to.

Employment agreements at technology and professional firms often include an invention assignment clause, a confidentiality clause and restrictions on soliciting colleagues or customers. Some include a noncompete. Each one can affect who owns your idea, who you can hire and when you can launch. Investors know this, and diligence on an early-stage company often includes a question about whether any founder's former employer could claim the core technology.

The invention assignment clause

This is the clause that matters most. It typically says that inventions you create during your employment belong to your employer. The scope varies widely. Narrow versions cover only work related to the employer's business or created using its resources. Broad versions try to capture almost anything you create while employed.

Several US states, including California, have statutes that limit how far these clauses can reach, typically protecting inventions developed entirely on your own time, without employer equipment or confidential information, and unrelated to the employer's business or research. The details differ by state, and the protections usually come with conditions that are easy to break by accident.

Look also for a prior inventions schedule. Many agreements let you list inventions you already owned when you joined. If you had a side project before you started the job and left that schedule blank, your position may be weaker than it needs to be.

The habits that create ownership problems

The fastest way to hand an employer a claim is to blur the line between your job and your project. Using a work laptop, a company cloud account or a corporate email address for the side project creates a record that it touched employer resources. So does working on it during business hours, even in a lunch break on the office network.

Overlap in subject matter is the other risk. If you build software tools at work and build a closely related software tool at home, the argument that your project relates to the employer's business becomes much easier to make. The closer the two are, the more careful you need to be.

Recruiting is a quieter trap. Nonsolicitation clauses often restrict you from hiring coworkers or approaching your employer's customers for a period after you leave. Talking to a colleague about joining you as a co-founder while you are both still employed can raise questions under those clauses and under your duty of loyalty to the employer.

Noncompetes and confidentiality

Noncompete enforceability depends heavily on state law, and the rules have been shifting at both the state and federal levels. Some states refuse to enforce most noncompetes for employees. Others enforce them if they are reasonable in scope, time and geography. Do not assume either way. Have an employment lawyer read yours against the law of the state that governs it.

Confidentiality obligations, by contrast, are broadly enforced and usually outlast your employment. Anything you learned on the job that the employer treats as confidential, such as customer lists, pricing, internal roadmaps or proprietary code, should stay out of your startup entirely.

If you have already started building

If you are reading this after the fact, do not panic and do not delete anything. Stop using employer equipment and accounts for the project immediately and move the work to your own devices from now on. Write down, while you still remember, when and where each part was built.

Then get advice before you resign or raise money, because the order in which you take those steps can matter. An attorney may suggest disclosing the project to your employer and asking for a release, or may conclude the risk is low enough to proceed. Either way, you want that judgment made calmly, not in the middle of an investor's diligence questions.

What to do before you write the first line of code

Find every agreement you signed when you joined and any you signed later, including equity grant documents, which sometimes contain their own restrictive covenants. Read the invention assignment, prior inventions, nonsolicitation, noncompete and confidentiality clauses carefully. Buy your own laptop, open personal accounts and work only on your own time. Keep dated notes of what you built and when.

If your project is anywhere near your employer's business, pay an employment attorney for an hour before you go further. In some cases the right move is to ask your employer for a written release confirming it has no claim. That conversation is awkward. It is far less awkward than a dispute that surfaces during your first financing.

This is general information, not legal advice. Speak to a qualified attorney in your jurisdiction before acting on any of it.