You work nine to five and six to midnight. It is very common for rising entrepreneurs to work their day jobs and grind away on their ideas at night. This strategy is called “moonlighting”, and occurs when an entrepreneur is working on her idea as a side hustle while also working for her employer. This double duty strategy has pros (like financial stability) and cons (like risking job security and IP rights). If executed incorrectly, moonlighting can open up a can of worms for the entrepreneur and her new venture.
Moonlighting can compromise the venture’s intellectual property and ownership rights, particularly if the venture is related to or in direct competition with the prior employer. For example, if a data scientist, while working at Amazon, moonlights and builds a company that tracks and analyzes data for shipping companies, Amazon could possibly own the IP rights to that company because it is heavily within the scope of work.
Of course, this all depends on the contractual agreements that the entrepreneur signed with her prior employer, as well as how she executes the idea. Factors that typically determine whether the prior employer has rights to the venture, include the contractual language in: (i) employee agreements; (ii) noncompete provisions; (iii) Proprietary Information and Inventions Assignments agreements; (iv) stock option agreements; and (v) non-solicitation provisions. To name a few. Entrepreneurs should read all the employment agreements that she signed very carefully and consult with a lawyer to determine whether, by pursuing the venture, she is breaching any of these, or other applicable, agreements.
An entrepreneur puts herself at further risk when she uses employer owned laptop and resources, works on the venture while “on the clock”, and/or creates IP that directly or indirectly competes against the prior employer’s business. Founders should draw a permanent line of ‘work’ and ‘venture’ related activities and resources. An entrepreneur should ensure that upon leaving her company she also leaves all company related information and materials (i.e. laptop, customer lists, e-files, etc).
Do I need to quit my day job?
Not necessarily. If you’re moonlighting, there are a few options, depending on how amenable the employer is to either: (i) waiving its rights to the invention; or (ii) taking a piece of the pie through equity shares.
Signed waiver. If an entrepreneur can get her prior employer on board and has an authorized representative sign a waiver that explicitly revokes any agreements or provisions that ban moonlighting, this is the best case scenario. Most employers will not be amenable to signing a waiver unless the venture does not compete with the employer’s business.
Bargain for investment or equity. If the employer is not agreeable to a signed waiver, the entrepreneur can potentially persuade the employer through offering equity in the venture in exchange for the signed waivers. If the entrepreneur can get her employer on board and excited about the venture, this is a viable option. Perhaps it would even lead to investment down the road.
Resign. Unfortunately, or fortunately as most entrepreneurs are looking for a way out of their current employment situation, the best path to protecting a venture is becoming financially stable enough to resign from the prior job and pursue the venture 100%. This will likely revoke the employment restrictions; however, it is important to check the enforceability of a non-compete agreement and pursue any waivers for the non-compete, if needed.
Starting a venture and considering the legal implications don’t always go hand in hand. You get excited about the pursuit, start working quickly, and want to spread the good news with everyone. We hope this article helps you consider the negative implications and how to protect your venture from becoming your employer’s property.
