Could Your Old Boss Own Your New Startup?

A Silicon Valley Horror Story

It’s a common dream: to leave the large high-tech company you work for and bring your brilliant startup idea to life. But what if your employment contract puts your new venture at risk?

In honor of Labor Day, we’re going to explore a clause in many employment agreements that might be problematic later on.

Does Your Boss Own Your Brain?

Especially if you work for a savvy high-tech company, you may see a clause in your employment agreement called “Assignment of Developments.” It will say something like:

Employee hereby assigns to the Employer any rights Employee may have or acquire in Business Opportunities and Proprietary Information.

“Business Opportunities” might be defined as

all business ideas, prospects, proposals, or other opportunities pertaining to the Employer’s line of business which are wholly or partially developed by the Employee during the Employment Term.

“Proprietary Information” might include

inventions, ideas, processes, programs, improvements, discoveries, developments, designs, and techniques…

It really does sound like your boss owns your brain.

Hooli-hoop: Do it on your own time

If you’re a fan of HBO’s Silicon Valley this may be sounding eerily familiar. If not, then SPOILER ALERT!!!

In the first two episodes of season 2, Pied Piper (a startup) is sued by Hooli (a giant corporation where the startup’s founder Richard used to work) claiming that Hooli owns Pied Piper’s valuable data compression technology – because of the employment agreement Richard signed.

Under California employment law, an employee doesn’t have to assign to an employer an invention 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

Richard seems to have dodged the bullet:

  • He developed the Pied Piper algorithm on his own time.
  • He used his own computer.
  • He didn’t use any of Hooli’s trade secrets.
  • The Pied Piper algorithm didn’t have anything to do with what Hooli was doing at the time Richard worked there.
  • The algorithm didn’t result from Richard’s work for Hooli.

Richard’s lawyer tells him that Hooli doesn’t have a leg to stand on – and that it will “only” cost $2.5 million in attorney’s fees to make the lawsuit go away.

Power play

And there’s the problem – even if you’re in the right, and you didn’t violate your employment agreement when you started your new company, if your former company is big and nasty and lawyered-up, and your new startup is hot, you may face this kind of lawsuit.

Even if you win in the end, a lawsuit like this could cast a shadow over your struggling new company and make it difficult or impossible to raise money. As one of the investors in Silicon Valley says, “We’re here to invest in innovation – not lawsuits.”

So how can you protect yourself?

You have several chances to reduce the risk associated with this type of clause:

  1. When you’re asked to sign an employment agreement, try to negotiate to make the definition of your employer’s “line of business” as narrow as possible. You don’t want the line of business defined as “anything to do with the Internet,” for example.
  2. When you’re still at your old job, DON’T use any of your employer’s information or resources (including your company computer), and don’t work on your startup idea while physically at your old place of employment or during normal business hours.
  3. When you’re still at your old job, to avoid wasting your time (and possibly giving your old employer a claim on your new company), find out whether your employer is doing anything in the same area as your potential startup before spending a lot of effort developing the idea.

So what happened in the Hooli v. Pied Piper case? Watch Silicon Valley to find out – or stay tuned to this blog.

If you want to read more, here’s another fun and educational blog about the legal issues in Silicon Valley from an attorney at the Sheppard Mullin law firm.

The information and materials in this blog are provided for general informational purposes only and are not intended to be legal advice.

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