To that end, in this blog post, we collaborate with Matthew Nisenboym and Marlin Adams of Northwestern Mutual, who generally discuss financial preparedness for aspiring entrepreneurs who are planning to leave their current employer to form their own startups or small businesses. We are delighted that Matt and Marlin graciously volunteered to share their invaluable advice with our followers.
How to Stay on Good Terms with Your Employer When Running Your Side Business
By: Smith Shapourian Mignano LLP
When you started working at your current job, you most likely signed a couple of documents that govern your relationship with your employer. They are:
(1) an employment contract or an employee handbook or manual; and
(2) a non-disclosure agreement, often referred to as an “NDA.”
Depending on what you do, one or both of these documents may have contained a non-compete clause. Generally, a non-compete clause is illegal and unenforceable against independent contractors and employees, but is legal and enforceable against owners of business entities in California.
The employee contract is otherwise known as an employee handbook or manual. An employee handbook or manual is a document which summarizes the company’s policies and procedures, as well as outlines key job-related information such as holiday arrangements, company rules, and disciplinary and grievance procedures. A copy of this document was likely provided to you on the first day of your employment at the company, and you probably have not looked at it since. If you’re starting your side business and don’t have a copy of this document, you can always procure a copy from HR.
To stay on good terms with your current employer while running a side business, you should thoroughly review your employee manual or handbook for any provisions that may be implicated by your side business. If you review your employee handbook and are still uncertain as to whether your side business violates one or more of its provisions, seek guidance. This could save you your job in the interim period while you are still ramping up your side business.
Especially for most of you who currently work in tech, you most likely signed an NDA when you started working for your current employer. Depending on its terms, an NDA may preclude you from using certain types of proprietary business information or intellectual property (“IP”) that you came to know in the context of your current job, in your side business. It may also prevent you from disclosing the information or IP to third parties. Again, if you’re planning to start your side business and don’t have a copy of this document, you can always procure a copy from HR.
To stay on good terms with your current employer while running a side business, you should also review your NDA. Two common questions that may arise include: (1) whether the work that you do for the company, or the IP that you create while at the company, is in fact owned by you or the company itself, pursuant to the NDA; and (2) whether you can utilize the proprietary business information or trade secrets of the company, such as the company’s customer lists, sales processes, confidential pricing guides, etc., that you gained in the context of your employment with the company, in your side business. If you review your NDA and are still uncertain whether you are violating it by running your side business, seek guidance.
For those of you who are employees or contractors at your current job in California, you likely do not have a non-compete agreement in place with your current employer, as non-compete agreements are void and against public policy as to people in your position in California. Therefore, it is unlikely that your California employer included a non-compete clause in your employee manual or NDA.
Conversely, you may have executed a non-compete agreement if you currently own a start-up business with co-founder(s). This non-compete agreement becomes especially important if and when you decide to leave your current company and sell your shares to your co-founders in order to ramp up your side business, on a full time basis. Section 16601 of the Business and Professions Code states: “Any person who sells the goodwill of a business, or any owner of a business entity selling or otherwise disposing of all of his or her ownership interest in the business entity, or any owner of a business entity that sells (a) all or substantially all of its operating assets together with the goodwill of the business entity, (b) all or substantially all of the operating assets of a division or a subsidiary of the business entity together with the goodwill of that division or subsidiary, or (c) all of the ownership interest of any subsidiary, may agree with the buyer to refrain from carrying on a similar business within a specified geographic area in which the business so sold, or that of the business entity, division, or subsidiary has been carried on, so long as the buyer, or any person deriving title to the goodwill or ownership interest from the buyer, carries on a like business therein.
To stay on good terms with your co-founder(s) at your current company while running a side business, you should review the non-compete agreement, which is also commonly known as a non-compete clause (often called an “NCC”), or covenant not to compete (“CNC”). The non-compete agreement could preclude you from entering into or starting a “similar” business in competition with your current company. So, if you are starting a second company behind the scenes while still working at your current start-up, and you and your co-founders signed a non-compete agreement or included a non-compete clause in your founder’s agreement, operation of your side business may violate that agreement or clause, and founder fall-out may result. Again, if you are uncertain as to whether you are violating a non-compete agreement or clause, or if you are on the verge of a founder fall-out, you can always seek guidance.
1. Be cautious if you work on your side business on “company time” or using company resources -- Again, this is a topic probably addressed in your employment contract. Chances are that if you devote time “on the job” to your side business, your work performance for your current employer may decline. This may have negative implications for your job security. Additionally, while tempting, be careful if you use company resources such as company laptops, company phones, or company-purchased technology or apps to work on your side business. In general, you should be aware that using your “on the job” time and resources to grow your side business may pose a risk to your job security at your current place of employment.
2. You may want to consider being upfront -- If you still want to maintain your side business while working for your current employer, you may want to consider whether it is in your best interest, from a practical standpoint, to talk to your employer about this very topic. Sometimes it is commonplace in a company for employees to receive “get permission” from the company to run their own consulting service side business “after hours.” If you know of coworkers that have received permission from your current employer to run a side business, this strategy may be worth further investigation. On the other hand, you may be mandated to talk with your employer about your side business. There may be terms in your employee handbook that contractually require employee disclosure of any side projects to the company so the company can check for conflicts of interest. Again, this is one of the reasons why careful review of your employee handbook from your current employer is crucial.
3. Be sensitive when poaching employees from your current employer -- There may even be a provision in your employment contract regarding poaching employees, some of which may be members of your team, from your current job and recruiting them to work for you when your side business ramps up. There have been costly legal battles that occur when entrepreneurs have encouraged their co-workers to jump ship with them, especially in circumstances funding rounds transform a side business into a high-growth enterprise.
In conclusion, a thorough review of your employee handbook, NDA, and if applicable, your non-compete agreement is crucial to understanding the risks associated with running your side business. This careful measure you can take that may keep your current employer (or co-founders, for those of you who own your own company) happy with you and your performance, so that you can stay at your current job while building your side business. If you don’t understand the terms of these documents, it is always worthwhile to seek guidance.
Smith Shapourian & Mignano, LLP is available to answer any questions or concerns you may have regarding running your side business, as well as to litigate any disagreements you may have arising out of the same. Feel free contact us to learn more.
How to Save Money in Advance of Leaving Your Current Job
By: Matthew Nisenboym and Marlin Adams of Northwestern Mutual
The San Francisco Bay Area is the start up capital of the world, leading to many innovators around the globe to leave their homes and strike gold here in Northern California. Silicon Valley has attracted people en masse, making this area one of the most expensive places to live and start a business. As financial professionals in the area that deal with finances, a common theme among everybody we sit down with is how expensive it is to live here. In the Bay Area, being a small business owner can be difficult, especially when not understanding the finances behind starting a business.
The best way to save money is to create a financial plan. This is typically associated with the B-word: budgeting. No matter who we are talking about -- from your A-list actor to a recent college graduate -- everyone needs a budget. It helps you stick with a plan and ensures that you save money for the short and long term.
Keeping it simple is key, and a general rule that we keep in mind is 20:60:20. At least 20 percent goes into savings and retirement vehicles. At most, 60 percent goes to essentials, such as rent, auto payment, personal loans, groceries, and insurance needs. The last pillar of expenses is the discretionary fund, and this should at most reach 20 percent of your after-tax dollars. This typically includes expenses incurred in trips to Starbucks or Chipotle, going out, cable, membership fees, movies, vacation, etc.
As small business owners, there are a few financial questions that entrepreneurs need to consider before venturing out on their own:
- Can you actually afford to start a business, and how long is your runway?
- What operating expenses will you need to cover?
- How much in taxes will you have to pay, and what business structure are you choosing?
- What benefits are you leaving behind when you start your new business?
To that end, Northwestern Mutual offers the following helpful links that entrepreneurs can access for insight regarding the aforementioned questions:
- 3 Ground Rules for Entrepreneurs
- Video Planning for the Success of Your Business
- Business Start-Up Site
This blog does not constitute solicitation or provision of legal advice, and does not establish an attorney-client relationship. This blog should not be used as a substitute for obtaining legal advice from an attorney licensed or authorized to practice in your jurisdiction. You should always consult a suitably qualified attorney regarding any specific legal problem or matter in a timely manner, as statutes of limitations may bar your claim.