Successful entrepreneurs understand how to use restrictive covenants (non-competes, non-solicitations, and non-disclosure agreements) to protect their businesses. In this post we’ll cover the differences and some practical tips for each.
A non-compete is just that–an obligation not to compete with another party. These are most often found in some form of employment agreement and often prohibit the employee from competing with the employer while employed and for a period of years after the employment ends.
While most states will enforce reasonably drafted non-compete provisions, you should use them with extreme caution (if you use them at all). You may experience a direct benefit when using them with senior-level employees, but your business (along with other businesses in your community) will likely experience negative side effects if your community uses non-competes broadly. That’s because they restrict works, reduce innovation, and can cause long-term negative effects to local economies.
Rather than relying on non-competes, you might consider using non-solicitations and/or non-disclosure agreements to protect your company’s rights.
Although related to non-competes, non-solicitations are different. These provisions restrict someone from soliciting your employees and/or your clients.
For example, an employment non-solicitation provision would prohibit a prior employee (or client) from inducing your employees to leave your company and to go work for them. And a client non-solicitation provision would prohibit a prior employee from asking your clients to fire you and to hire them.
In both cases, it is more likely to be enforced by a court if it is narrowly tailored to protect a legitimate business interest. Usually, this means limited to some degree to a number of years after the relationship between you and your employee (or client) ends.
It is almost always a good idea to include a non-solicitation (especially in the absence of a non-compete) to ensure your employment and client relationships are not harmed.
While you may or may not use non-competes and non-solicitations, you should almost always use a non-disclosure agreement whenever you are giving your confidential information to anyone–regardless if they are inside or outside of your company.
In short, a non-disclosure agreement will define what is and what is not “confidential” and then outline what the recipient can and cannot do with that information. Most often they will be required to protect it, not use it for an unauthorized purpose, and not disclose it to third parties. An NDA can be unilateral (in which case only one party has confidentiality obligations) or mutual (in which case both parties have confidentiality obligations).
You can create a stand-alone non-disclosure agreement, or you can just include a non-disclosure obligation in another agreement such as in an employment agreement.
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