Non-Solicitation Agreements
What's The Risk?
When I first suggest to owners that they use covenants not to compete or non-solicitation agreements for key employees to protect their businesses, their response tells me a great deal about how they perceive (and I’d argue misunderstand) both risk and reward. Their typical objections are, “I’m not going to destroy my relationship with my best employees by asking them to sign agreements that:
- Imply that I don’t trust them.
- I’ve heard aren’t even enforceable.
Before we tackle those assumptions, let’s assess your risk.
The Risk of Employee Departure
If you are within five years of leaving your business, I hope you are moving away from involvement in day-to-day operations and transferring responsibility for critical business functions (such as fostering closer relationships with important customers) to key employees. This transition on your part is necessary in creating value—transferable value apart from you—that buyers demand. The downside to this necessary shift of responsibility is that your business becomes extremely vulnerable should those key employees exit. Once customers, employees and vendors form relationships with key employees, those employees can take them when they leave.
If that happens, the consequences to you and your business are immediate:
- Your exit is delayed.
- The transferable value of the business takes a hit.
- The very existence of the business may be jeopardized.
If you assume that this risk does not apply to you since you haven’t yet started to transfer responsibility, think again. You must create transferable value in order to exit on your terms so the ideal time to prevent departing key employees from harming your company is right now, before they hold all the cards.
Assess Your Assumptions
The two most common assumptions about non-solicitation agreements relate to enforceability and trust.
Enforceability
Covenants not to compete restrain persons from freely engaging in their trade or occupation. Such restraint runs counter to the public policy of most (if not all) states. States favor an individual’s right to pursue any lawful employment and enterprise of choice. If not outright prohibited, restrictions or limits on a person’s ability to earn a living are carefully circumscribed.
A few states, specifically California, have determined, through legislation that covenants not to compete are, on their face, invalid. In most states, however, carefully drafted covenants are enforceable. If you wish to implement covenants, be certain to work with an experienced business attorney familiar with the laws in the states in which you operate.
Trust
Even in states that allow these arrangements, many employers are reluctant to present them to their key employees for fear that they will alienate key employees. Owners expect employees to see these arrangements (that protect the company from employee actions) as a poor substitute for trust and loyalty. Owners fear that presenting key employees with a covenant not to compete will cause employees to leave the company.
Is that fear justified or can you create enforceable agreements that prevent your employees from taking employees, customers, vendors and proprietary information in a manner that is not offensive to your key employees?
Source: forbes
Patty Block, President and Founder of The Block Group, established her company to advocate for women-owned businesses, helping them position their companies for strategic growth. Charting the course for impactful, sustainable, profitable businesses, the beacon is control: of your strategic direction, your money, your time, your staffing, and your ability to bring in business. The Block Group brings together the people, resources and ideas that build results.
Growth for women-owned businesses.
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