What? Non-compete agreements, also known as restrictive covenants, are legal contracts between a business and another person or business that limits the other person or business’ ability to compete in the same market, in one form or another.
Why? When you enter into a business relationship with a worker (employee or independent contractor), partner, vendor, or anyone else for that matter, during the relationship you will inevitably disclose information about your business, ideas, processes, systems, strategies, and other things, some or all of which may be considered valuable intellectual property (your “IP”).If you do not protect your intellectual property, these people can capitalize on your IP, compete with you, and negatively affect your business. There are a number of agreements businesses can use to protect itself against these bad actors, such as confidentiality and non-disclosure agreements, and trade-secret agreements.Another way to protect your business is to restrict their ability to compete with you in your market using a non-compete agreement.
When? Ideally, non-compete agreements should be signed prior to the business relationship, or during the on-boarding process, however, if you missed this opportunity there is nothing prohibiting the parties from signing one at any time during the business relationship. If you wait until after the relationship, it is still possible to have one signed, but this may require additional consideration, such as a severance or settlement payment.
With Whom? It is a good idea to have employees, independent contractors (sometimes referred to as 1099 workers) sign non-compete agreements, especially if they have access to any of your business IP. In addition, you should also consider having each of the following sign a non-compete agreement, depending on the uniqueness of your products and/or services, their exposure to your IP, or to protect your territory: certain vendors, business partners and principals, members of board of directors, certain customers, investors, and any other person or entity that your business does business with. In determining whether to ask for or require a non-compete agreement, your first consideration should be whether or not the other party poses a risk to your business if he/she/it is allowed to compete with you, or work for your competitor. If so, you should analyze whether their working with your business will result in them being exposed to your IP in a manner in which they were allowed to gained unique knowledge, skills, abilities, relationship, etc…. which, if they competed with you directly or by working with your competitor, would give them an unfair advantage, edge, or benefit that they would not otherwise have. If so, then you should strongly consider having them sign a non-compete agreement, or not do business with them.