I’m currently employed. Can I work on my startup?

TLDR: It is best to leave your current role before starting a new company and there are a host of complicated issues you will need to pay attention to if you decide to stay at your current job while starting a new company.

Although it might be tempting to begin working on your new start-up idea while you are still employed at another company, it is always safer to leave your current role before starting a new company, and in either case, there are a number of issues that you need to consider very carefully, including:

1. Existing Agreements:

First, you should carefully review your current employment agreements to determine your obligations to your employer. Are there any conflicts between the work that you are planning and these obligations?

Note that, even if you are not an “employee” of a company, you should review the terms of consulting, advisor, or other agreements with any company to which you are currently providing services. These other agreements may have provisions that restrict your ability to work on your own start-up while you are engaged with that company, which are similar to those discussed below in the context of employment agreements. Sometimes these restrictions last for a period of time after your current engagement ends.

Some agreements that you might have with your current employer include the following:

• Offer letter
• Employment agreement
• Invention assignment agreement
• Confidentiality agreement
• Non-competition and/or non-solicitation agreement
• Agreements that were signed in connection with the sale of a prior company

When reviewing your existing agreements, focus on provisions relating to intellectual property. In particular, you want to be sure that your current employer will not have a claim to the intellectual property that you are developing, or will develop, in connection with your new business. Well-drafted employment agreements typically include invention assignment provisions, which say (in the broadest terms) that any intellectual property that you create while you are employed belongs to your employer. Carefully assess these provisions. In order to protect your start-up’s intellectual property, you should consider whether you need to put your start-up plans on hold until you are ready to quit your current job.

1. Legal Duties:

Next, consider any legal duties that you may owe to your employer or to another party. These may not be spelled out in written agreements and may be less obvious. For example, if you are a director or an officer of a company, you owe a duty of loyalty to the company under the law to put the company first above your own interests, regardless of whether these duties are explicitly stated in a written agreement. Even regular employees have duties of loyalty to their current employee—for instance, to not compete with the company while still employed. If there is a possibility of business overlap or another conflict between the company you work for and your new start-up, consider whether to delay the formation of your new start-up until you can take remedial actions, such as terminating the conflicting agreements or relinquishing your current positions.

1. Potential Exceptions for California Employees

If you are an employee in California, Section 2870 of the California Labor Code provides certain exceptions to your employer’s ability to claim ownership of your inventions. In short, any invention that you create entirely on your own time without using anything that belongs to your employer, and that does not relate in any way to your employment or the business of your employer, belongs to you. If there is a dispute, however, it could be very difficult to prove that all of the prongs of this test are true (see below for the rule itself). So to be safe, you should either avoid having to rely on this exemption or be very cautious and careful if you are currently employed and beginning to work on your start-up on the side.

The following is an excerpt from Section 2870 of the California Labor Code regarding inventions made by an employee of a company:

a) Any provision in an employment agreement which provides that an employee shall assign, or offer to assign, any of his or her rights in an invention to his or her employer shall not apply to an invention that the employee developed entirely on his or her own time without using the employer’s equipment, supplies, facilities, or trade secret information except for those inventions that either:

1. Relate at the time of conception or reduction to practice of the invention to the employer’s business, or actual or demonstrably anticipated research or development of the employer; or
2. Result from any work performed by the employee for the employer

b) To the extent a provision in an employment agreement purports to require an employee to assign an invention otherwise excluded from being required to be assigned under subdivision (a), the provision is against the public policy of this state and is unenforceable.

Conclusion: What This Means for You

Generally speaking, from both an investment and intellectual property perspective, it is simplest if you have no conflicting employment or other obligations when pursuing your start-up. In fact, until you fully commit to building and growing your start-up, most serious investors won’t commit to funding it either. Because investors review hundreds if not thousands of business plans in a given year, you should be careful not to give them any reason to pass on yours—especially if it’s a reason related to intellectual property concerns. Even if you may come under the legal exception above, investors have a higher bar for evaluating these concerns, as the cost of litigating an intellectual property claim (even if you ultimately prevail) can threaten or wipe out the value of their investment.

Quitting your current job to pursue your new start-up full-time, however, is not without its own considerations. Before handing in your notice to your current employer, take some time to understand the legal and financial implications of resigning from your job.

For example, any stock options or restricted stock that you have been awarded at your current job may be subject to vesting terms and exercise deadlines. If you are planning to exercise your options after you quit, make sure you have enough money in the bank to pay for your shares before the applicable deadline expires. You should also consider the impact of losing the employee benefits you may have at your current job.

Finally, when you leave your current job, make sure to return all company property, including computers, company files, code, proprietary notes, and any other such property. This will all help ensure that you have a clean slate at your new start-up and avoid any intellectual property complications that might arise from you keeping and continuing to use this property.

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