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"We are just about to launch our new company. We have prepared the business plan, and we have lined up the VCs who are willing to invest. We are just about to sign the term sheet and hope to have the funds in a couple of weeks. We have also located a building and we would like to sign a lease. Meanwhile, we're still living paycheck to paycheck, and we really can't afford to quit our jobs. What we really want to do is stay at our current employers up until the last minute, until we really have everything in place. Can we sign the term sheet with the VCs or sign the lease while we are still employed?" This is a crucial issue for people who are starting their own businesses. When do you make the break and leave your employer? There has been a lot of case law in California over the past 30 years or more on this subject. As a general rule, it is not unlawful to compete against a former employer. California Business and Professions Code 16600 prohibit employers from restricting a former employee's right to work for a competitor, or to form a competing business. The question is, before you leave your current employer, when do mere preparations to compete cross the line and become unfair competition or breach of fiduciary duty to your current employer? There is no bright line test here, but certainly the more things that you do while you are still on the payroll at your current place of work, the more problems are going to be raised. Arranging financing, signing a lease, getting customers lined up, getting vendors lined up, hiring employees Ð all of these things give the appearance that you are already in business. Ultimately, when the judge looks at the facts if a lawsuit is filed, she is going to do a gut-level review of what has occurred and ask herself whether you were already running your own business while still on the payroll of your current employer. While no single action is going to give rise to a liability, along the continuum, the more you do while still on the payroll, the greater the risk. As far as the term sheet is concerned, there is also the issue that you may be usurping a corporate opportunity that should belong to your current employer. Would this financing be something that your current employer might have been capable of using? Could your employer have used the money to develop its business? "I signed a standard agreement with my employer when I joined the company, and it requires me to assign to the Company all inventions I might come up with. The VCs have expressed some concern that I may not actually own the technology I've developed." Here, the question is whether or not you own what is supposed to become the core technology of your new company. Most states have a statute that addresses this issue, and in California you can find it in Section 2870 of the Labor Code. This provision says that the standard agreement most employees sign these days - the one which says, " While I am employed here, I'll turn over all my inventions to the Company"- is enforceable, although there are some narrow safe harbors for the employee, so that an employee who comes up with an invention of her own while still on the payroll, in some cases, might be able to take it with her to her new business. But there are several conditions to this safe harbor. Some of these conditions are easy to satisfy, and some of them are difficult. First of all, you must have developed it on your own time. That typically means nights and weekends. (In some Silicon Valley companies, it may mean working at home between 1 a.m. and 5 a.m., and maybe a little time on the weekends, but the new technology has to be developed on your own time.) The second part of the rule is that you cannot have used your employer's facilities, supplies, or trade secrets to create the invention. Here, there are two further conditions. The easy part is the physical stuff. For example, you should not use your work station on your employer's premises to do any of your own coding, or to produce your business plan, nor should you use the fax machines, copiers, telephones or computers to communication about your new venture. This can be a bit awkward but, to avoid problems, you've got to go home and pick up your emails from your would-be business partner on your AOL account at home, use your personal laptop, use your personal cell phone, and so forth. You should also not use your former employer's library. The other part of the test is that you can't use the trade secrets of your current employer. Obviously this means you must not use any of your employer's proprietary information in developing your own ideas. But keep in mind that proprietary information is very broadly defined, and goes much beyond technical terms and know-how to involve such things as financial information, marketing studies prepared for the employer, compilations of industry publications and customer lists and contact names. In addition to that, you also need to avoid appropriating your employer's methods of doing business or contacting its customers. In addition, there are still a couple more traps by which an employer can be the actual owner of your invention. If your invention relates to your employer's business directly or to any work you are currently doing for your employer, your employer owns it. Furthermore, even if your invention does not currently relate directly to your employer's business, your employer can try to claim ownership of your invention if it can prove that it relates to the R&D of the company. Employees are not only prohibited from using their employers' current or "actual" R&D, but future R&D well. The killer phrase in this statute is "demonstrably anticipated R&D." What does that mean? For the employer, that can mean almost anything. An employer may argue that a few brainstorming sessions and some writings on a white board constitute demonstrably anticipated R&D. A more reasonable position would be that, for research and development to be demonstrably anticipated, it can't be that ephemeral - it needs to be documented somewhere, on somebody's hard drive or on a piece of paper. But in large companies, the real risk is that you probably don't know all the research that's being conducted in all of the various divisions and groups within the organization. This is a real danger zone, because you can get a clean bill of health from your lawyer, start up your business and then six months later someone says, "Wait a minute, we had this research group in Siberia..." This is one of the most common arguments that an employer may employ to try to recapture an invention. If your new idea is truly not competitive with your employer's business, there is a possible alternative. Depending on the company, in Silicon Valley, employers are often used to the idea that employees go off to start their own businesses. In fact, you might try saying, "Hey, this has been a great run, and I've had a great time working with you, but I'm going to go off and do this other completely unrelated thing. Do you have any objection?" The answer may be, "No, that's fine. And, by the way, can I invest?" In any case, preserving a positive relationship with your former employer can be beneficial. Speaking from his own positive experience in founding Ikanos Communications, Behrooz Rezvani advises, "If you want to start a company, make a clear break with the previous job. Make sure you have a very good, solid relationship with your old company." "I am going to be leaving my Company in a couple of weeks. What stuff from my office can I take? You know I've accumulated lots of stuff as an engineer - I've got lots of technical manuals and the like, as well as various marketing materials." The basic rule is that you can take your personal photos, coffee cup and plants and leave just about everything else behind. Almost anything you take with you could be construed to be trade secret information or proprietary materials belonging to your company. In one case a former employer claimed that internal phone lists were trade secrets, because the direct dial numbers of the company's employees could be used to recruit employees away from the company, and no one on the outside had access to this information. In another case, an employer claimed that a manual of janitorial procedures was a trade secret, and that a departing employee who had inadvertently taken it with him in a big pile of papers was taking a trade secret document. In addition, there are criminal statutes in many states that make it a felony to take trade secrets from your current employer, and there are misdemeanor and other statutes in most other states that criminalize the taking of property. So, you want to make sure that you leave behind everything that belongs to your company, whether or not it rises to the level of a trade secret. You certainly don't want to have the police come to your new company unannounced and waving a search warrant and start emptying files and cabinets. Even if you are later exonerated, you will still have had to appear in criminal court in front of a criminal judge. You could also find yourself in the headlines of the Mercury News, and that kind of negative publicity can really slow down investments in your new venture. This nightmare scenario has probably occurred a number of times in the Valley over the last 10 years, and it's difficult for a company to survive such an ordeal. It will stop many questions, even before they are asked, if you say without exception or reservation, "I walked out of my former employer's building carrying nothing - no documents, no boxes, no computer disks. Nothing."
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