Ask HN: Could company force departing co-founder to sign non-compete?

[iag]

Dear HN:

I am running into a situation where I am being forced out of the company I co-founded. I have not signed any Non-Compete agreements in the past, and I don't want to sign it as it will severely limit my ability to work in the future.

The only piece of legal document we have signed so far is a non-binding MoU that states if I want to claim a director seat, I need to sign a non-compete. Since that document was never entered into a formal agreement, and I no longer seek the director seat, I feel no longer obligated to sign away my rights.

It'd be great if someone can give me some advice on this matter before I escalate to the lawyers. I'm turning to HN for help because I feel this might be a pretty common issue with the audience here.

Thanks in advance for your advice!

[davismwfl]

I'd ask an attorney to review the MoU and any corporate formation documents. As well as which state you are in and any obligations you may have if you remain in an equity position over a certain amount.

Overall though, from what I know and IANAL, you are not obligated to sign any documents on the way out. However, there could be ramifications like the forfeiture of your equity (if that was in the original agreement etc). So that's why I suggest letting an attorney review all the documents. My bet though is if you didn't have all the standard non-compete etc up front then they don't exist and you are probably safe to walk away without signing it, losing the board seat of course.

Good luck.

[iag]

The parent company is based out of HK, but the operating company is based in Philippines.

My co-founder threatened to sue me in the US as I am a US citizen.

Funny enough, if I recall correctly, my home state California has one of the weakest non-compete law.

[davismwfl]

Yea, California is one of the weakest for non-competes from what I understand too.

I don't think your co-founder really stands much of a chance honestly, except he/she can hold any money etc that you put into the company. So honestly, it might be worth an hour of time with a competent attorney to ask a few questions and make sure you do things to insulate yourself.

That all said, I can't imagine what they would sue you over in this case for not signing. They are literally on the other side of the world, and unless your co-founder is just flush with cash and an ass that is willing to tie up your time in court etc then I doubt this amounts to anything other than hurt feelings and a shit relationship, at least for a while.

[iag]

Really appreciate your comment! Very helpful.

[bradleyland]

Ugh. First things first, you're going to have to compartmentalize this issue, because it is unlikely that you'll find a lawyer willing to give you any advice that is relevant in HK, the Philippines, and the US. I would focus on the US, unless you have specific need to travel to HK and the Philippines regularly. If you do have to travel to those locations, you should check your legal status in your destination country before traveling there. If you don't respond to a lawsuit, the plaintiff may win by default, and you may find yourself entangled in a foreign legal system upon arrival.

With regard to the US, you still need to talk to a lawyer. In general, any agreement is invalid without "consideration". That is, you can't enter in to a one-sided agreement, and you can't enter in to an agreement where the consideration occurred in the past. So even if you did sign a document right now, you'd be owed some consideration in order for it to be valid. There are, of course, exceptions to this rule, which is why you really should spend the money to sit down with an attorney who practices business law and is within the jurisdiction in which you are being threatened (California).

It seems extremely unlikely that the plaintiff would be successful in this case, but I have some general advice for you. There's a saying in the US that, "You may beat the rap but you can't beat the ride." This saying means that (in a criminal context) the charges against you may not hold up in court, but you're still going for a ride in the back of a police car if you thumb your nose at authority. I really wish there were an equivalent for matters of civil law, because even a laughably bad lawsuit can cost significant sums of money to obtain a dismissal, or even worse, summary judgement.

I am on year 5 of litigation involving an agreement that A) I never signed, B) never saw, and C) was never a member of the company for which the agreement was made. I was dragged in to the suit on "civil conspiracy" charges, alledging that I knew of the agreement and conspired to assist the signor in breaking it. It has cost me a significant chunk of what would have otherwise been retirement savings. Everyone who sees the case (lawyer or otherwise) says that it's ridiculous, but that doesn't seem to stop the process from dragging on and on.

My advice is this: whatever you may be owed in this situation, weigh it against the fact that it sounds like you were involved with a litigious asshole. Don't mire yourself down in the legal mud unless you absolutely have to. I'm not saying you should acquiesce to his demands, but don't be cavalier about it either. Go talk to an attorney. Ask them to be brutally honest with you, and ask them all the "what ifs" you can think of. Evaluate what risks lie on the other side of a possible lawsuit, even if it is a frivolous one.

[hwstar]

If you live in California, non-competes are not allowed under section 16600 of the Business and Professions code. They could file a lawsuit, but it would be thrown out by the California courts. Lawyers have a term for this tactic: "in terrorem". It is used against persons not familiar with the law.

[fragmede]

That's not entirely true.

There are specific cases where non-competes are valid in California, relating to being the business owner (aka having an equity stake), which OP has, to some degree.

See Cal. Bus. & Prof. Code §§ 16602.5 or Wikipedia for more. http://en.wikipedia.org/wiki/Non-compete_clause#Exceptions_-...

OP, time to lawyer up.

[pan69]

I don't think OP is saying that he's starting a competing business in which case, he's not competing. However, it might be his intention though, can't tell.

I believe the question is in regards to "signing" a non-compete on the way out.

[noir_lord]

No.

They can offer you an incentive to sign one (bag of cash etc) but they can't make you sign a legal contract.

[josho]

In all likelihood you'll be crossing paths with these folks again at some time. So, be professional.

If you don't like the non-compete because it is too all encompassing then counter with something more narrow in scope.

However, if you don't like the non-compete because you were forced out and you have an axe to grind, then own that and separate your personal feelings from the business. With your newfound clarity re-examine the situation and you may realize the non-compete isn't a big deal after all. Are you really planning on starting your own startup to compete directly with them?

[newtronic]

Do you want anything from them? Equity, severance, back pay, health care for 18 months (i mean besides cobra). If so, this is your chance to negotiate something. All the advice about a attorney, i agree with.

[dragonwriter]

> Could company force departing co-founder to sign non-compete?

Probably not, though the answer will depend on the law of the specific jurisdiction that governs your relationship. They could offer something in exchange for signing a non-compete, but if you haven't previously agreed in a legal-binding way to a non-compete, and or made a binding agreement pledging to do so in the future, then even if the conditions apply in which a non-compete would be valid and enforceable in your jurisdiction, there doesn't seem any way that they could legally compel you to sign it or legally withhold anything to which you are already entitled if you do not.

But if you are being forced out of a company you cofounded, you probably should talk to a lawyer familiar with the law of your jurisdiction about the whole situation (not just the non-compete aspects.) And if they are attempting to withhold things that belong to you unless you sign a non-compete, then you really need to talk to a lawyer, because the issue then becomes "can I compel them to honor my existing rights, and, if so, how" more than "can they force me to sign a non-compete".

[gesman]

Unless they have other reasons to blackmail you into signing - then not.

[iag]

They are withholding my investment into the company, and my equity. They are also threatening to sue me in the US even though this is a non-US company.

I think they are bluffing, but I just want to double check.

[EpicEng]

If they're threatening a lawsuit, it's probably time to get a lawyer.

[gesman]

Second that.

You have more stuff going on than the title of your post suggests.

[dman]

Talk to a lawyer.