September 12, 2012

Employees will often come to their attorney to discuss launching a new business while they are still working for someone else.  Consider this scenario about a prospective client, who I’ll call Laura, and some ideas she has about exploiting opportunities that she has identified while working at Spartacus Technologies.

Laura told me that several months ago she proposed an alternative business model to the principals of Spartacus and they told her that they weren’t in a position to pursue it because they are deeply entrenched in their current business model and could not take the risk of scaling a new model.  They also told her that their answer was firm and that they would not be willing to revisit it in the future.

Laura is happy with her work but really thinks this is going to be something big and she is considering approaching the principals and asking to be released from her non-compete and employment agreements so that she can pursue investors to start a new company. In exchange, she is willing to propose some kind of “silent partner” agreement with the current company.  Laura wanted some help about how best to approach Spartacus and how to structure her proposal.

First, let’s return to some basic.  If Laura’s new business was truly totally unrelated to the activities of Spartacus then her duties are relatively limited and based on straightforward “common sense”.  On the other hand, significant problems may arise when the idea for the new business appears to be related to Laura’s exposure to the technology of her current employer, its business practices, financial condition and customers.  For example, an employee might become interested in developing technology that is competitive with or closely related to the technology used by his or her current employer, or an employee may want to compete with the current employer by tapping into the same customer relationships.

Either of these scenarios should raise a “red flag” and should trigger a discussion of various restrictions that the employee may need to overcome before moving forward with the new business.  It goes without saying that an angry former employer with resources and armed with a reasonable legal basis to object can stop a new business dead in its tracks!

In this scenario it seems pretty clear that there is no new business here unless Spartacus is on board somehow since our fledgling entrepreneur would be relying on ideas and information that her current employer will likely claim ownership rights in.  Laura needs to come up with a simple ownership and management model for the new venture and figure just how Spartacus would be involved.  For example, would Spartacus need to license certain intellectual property to the new venture and, if so, what would be the terms of the license?  This information is important to potential investors.

Spartacus also needs to be “on board” for the due diligence process that investors will require—they won’t be satisfied with vague statements like “I have a silent partner lined up that will deliver me the technology as soon as the money comes in”.  Spartacus also needs to be secure about just how large a commitment it will be required to make.  If they are to be a significant, and named, strategic alliance partner for the new company it will be a diversion from the current business that they may not willing to take on.

Bottom line is that Spartacus cannot really be a “silent partner”—but Laura can do her homework to set things up in a way that leverages the good name of Spartacus while providing Spartacus with the peace of mind that its investment will be well managed and protected.