Ask Andi: Get Your Non-Compete Agreements in Writing
BY ANDI GRAYDilemma: We have a problem with non-competes: neither our employees nor our affiliates have signed one. Just recently, a friend of ours had an employee walk out and try to take clients with him. And another friend had a partner try to steal business that they had agreed to work on together. We’ve always worked on trust; we would never think of taking what belongs to someone else. We expect the same of our employees and vendors. What can we do to better protect ourselves?
Thoughts of the Day: Agreements in writing define the rules of engagement, and often the best defense is a good offense. When you work on a written agreement, make sure you put together something that’s enforceable. If you’re planning on buying a business, get a non-compete from the seller and make sure that all of their non-competes can be enforced legally.
Most entrepreneurs are good offense players. They see an opportunity and go for it, but they tend not to be so good on defense. As a result, they end up trusting that things will work out, don’t bother to cross their t’s and dot their i’s, and leave their businesses unnecessarily exposed.
Pay attention to the details of how your company works with other businesses, including affiliates. Put mutual arrangements or understandings in writing. Ask outside consultants, especially attorneys, to advise you. Even if you don’t like the legal advice you’re getting, pay attention to it. Remember that if asking to put something in writing is likely to nix a deal, avoid the risk altogether. No matter how enticing an opportunity looks in the moment, any unwillingness to sign a written agreement is a serious warning sign.
When it comes to employment agreements, get them in writing upfront and then do everything possible to build goodwill and establish incentives to work together.
Schedule bonus payments with your employees and vendor-partners over time with a caveat in your agreements that beneficiaries must both work for your company and be in good standing to receive their bonuses. Treat employees well and help them achieve what they want, and most will try to protect you and your company in the future.
Do extensive background checks before hiring. Look for ethical breaches. If a new employee is coming to your company offering to bring you a competitor’s accounts, consider that this same person may turn on you someday. This is especially taboo in a collaborative industry like chauffeured transportation.
To be enforceable, a non-compete has to meet several criteria. It must:
• Be geographically restrictive, but not too restricting
• Cover a specific period of time, but not too long
• Be signed upfront or otherwise signed in exchange for a benefit
• Fit within the laws of the state in which the employee works
As your business grows, it will be important to have good legal representation, so get a law firm signed up now. Hire one that both has successfully defended other companies’ non-compete agreements and understands your industry. Follow their advice even if you don’t like it. If there’s a question, get a second opinion.
Make it policy that all new employees sign a nondisclosure, non-compete agreement. You’re going to have to make it worth your current employees’ while to sign a new agreement. Keeping their job isn’t good enough. Increase benefits, add a 401(k), and increase responsibility and compensation—check with your law firm on what might be deemed sufficient.
Considering an acquisition? Make sure the original owner signs a non-compete, but be aware that the seller’s employees could strike out on their own. Offer signing bonuses and employment sufficient to get them to sign your company’s documents. [CD0317] Looking for a good book? Try “Negotiating and Drafting Employment Agreements: Leading Lawyers on Constructing Effective Employment Agreements”
Andi Gray is the Founder of the business consulting firm Strategy Leaders. She can be reached at firstname.lastname@example.org.