PART 4: Key Legal Questions to Consider when Starting and Growing a Tech Business

March 1st, 2012
MMM Tech Perspectives

What are the Top 10 legal questions to consider in starting and growing a tech business? Outlined below is question #4 in this series of questions a lawyer asks an entrepreneur to minimize liability and maximize profitability (view question #1 here, question #2 here and question #3 here). These questions address legal issues faced by tech companies through the business life cycle. While these questions may not apply to all companies, they’re a helpful road map to address legal pitfalls in building a successful tech business.

Following the question below, there are secondary questions designed to elicit important information from the entrepreneur. Then, the legal conclusion and practical pointers are included. As referenced below, the new venture to be formed by the entrepreneur is Newco and the current (and soon to be former) employer of the entrepreneur is Employer.

Q4: When and how should my entrepreneur/client terminate employment from the Employer to start the new venture, Newco?

Timing can be everything when it comes to limiting legal exposure for the entrepreneur leaving the current Employer and forming Newco. Premature actions by the entrepreneur can expose the entrepreneur to unnecessary legal risk and delay or irreparably damage the successful launch of Newco. There are several pivotal questions to be asked before the entrepreneur begins implementing the Newco business plan.

A. Is there an employment agreement or restrictive covenants agreement with the Employer that impacts the entrepreneur? If so, what law governs, and will this law be controlling given the residence of the entrepreneur?

B. Will the Georgia Restrictive Covenants Act apply to the termination and interpretation of the relevant employment agreement? If so, how does the Act impact the restrictive covenants and could they be reformed or revised by a court to be enforceable against the entrepreneur?

C. Will there be a Separation Agreement and severance to be paid as part of the termination? If so, will the Separation Agreement include mutual releases of both the Employer and the employee/entrepreneur?

D. Is the entrepreneur an officer, director or controlling shareholder of the Employer? Will the entrepreneur be resigning/terminating from these positions at the same time as termination of employment? Does the entrepreneur have indemnification protection as a result of being a former director or officer?

E. Will the entrepreneur be starting a competitive business? If so, has the entrepreneur begun developing a business plan or executive summary with regard to the venture? Is there a question as to ownership of these works if they were created while the entrepreneur was still employed by the Employer?

F. If the entrepreneur has begun creating a business plan or executive summary, explore in greater detail the actual steps taken in connection with the proposed formation of the new business, including any product development activities. Has the entrepreneur used any trade secrets, works of authorship or copyrighted materials in connection with the plans for the new venture?

G. If the entrepreneur is subject to a restrictive covenants agreement that is believed to be enforceable, what restrictions might be placed on the entrepreneur in connection with formation of Newco? Could the entrepreneur be isolated in Newco is such a way as to avoid violating the restrictive covenants?

H. Should the entrepreneur consider approaching the current Employer to discuss the proposed new venture and possible ways to work together? What are the risks/rewards in doing so?

I. Has the entrepreneur’s Employer filed legal actions in the past against departing employees with regard to the enforceability of restrictive covenants?

J. Has the entrepreneur contacted any other employees from the company to discuss the new business venture? If so, when did these discussions occur and what was discussed?

K. Is the entrepreneur prepared to leave employment immediately to begin the new venture and to reduce the legal liability to the Employer? If not, what risks are attendant to the proposed manner for starting the new business?

Answer: A significant legal issue relates to the time for the entrepreneur to terminate employment and start a new business venture. Litigation often arises where the entrepreneur has begun business planning prior to departure from the Employer, possibly in violation of an existing employment agreement or restrictive covenant agreement or fiduciary duties as an officer or director of the Employer. The conservative approach is for the entrepreneur to terminate employment before beginning active engagement of resources in preparation of a business plan for Newco. Also, the entrepreneur should be careful with and generally avoid discussions with fellow employees relating to any proposed new venture – at least until the entrepreneur has departed from the Employer in all capacities.

Previous Questions:

Question #1
Question #2
Question #3
This information is presented for educational purposes and is not intended to constitute legal advice. Opinions expressed are those of the author and not of Morris, Manning & Martin, LLP; see our disclaimer for more information.