Noncompete Agreements . . .
are contracts that discourage employees from leaving
their employer by preventing them from performing a similar job for a
competitor. They are used to encourage key employees to remain with
their company and to prevent them from competing with it after they
leave. Most venture capitalists require noncompete agreements from top
management as a condition to funding. Investors often combine stock
vesting agreements and stock bonus plans with noncompete agreements to
better insure management loyalty. Trade secrecy and confidentiality
agreements are also commonly included in noncompete agreements.
To be enforceable, noncompete agreements need to be
drafted carefully. Courts dislike noncompete agreements because they
interfere with a personís ability to earn a living. As a rule,
courts will enforce them only when their provisions are carefully
limited. The types of restrictions these agreements must contain to be
enforceable vary from state to state. Some statesí courts will not
enforce any employee noncompete agreement. Others will, but only if
they are entered into in connection with the sale or financing of a
company. All states require noncompete agreements to be tightly drawn
in compliance with the particular requirements of local law.
Although the rules vary from state to state and
different states apply similar rules with different emphasis, a few
principles of noncompete agreements do have general applicability. All
states require noncompete agreements to be in writing and supported by
valuable consideration. Most require them to be restricted as to
territory and time. That is, an employee cannot be prevented from
competing everywhere forever.
Many states require that the competitive behavior that
is restricted reflects only the activities the employee undertook for
the company. Some states will not enforce a noncompete agreement that
is signed after the employee joins the company unless the employee
receives something significant from the company at the time. However,
most states relax their rules when reviewing a noncompete agreement
entered into between management and a company buyer or financier.
It is difficult to draft an enforceable noncompete
agreement, especially one that is not entered into in connection with
a company financing. Only an attorney who is knowledgeable about his
stateís noncompete laws can insure that a noncompete agreement is
drafted properly. When noncompete agreements are important, management
should be sure to enlist the aid of a qualified attorney to either
draft the agreement or consult with management as to the agreementís
scope and enforceability. See:
Agreements, Golden Handcuffs,
(Incentive Stock Options), Options,
Capital, Vesting Schedules.