Non-Compete and Non-Solicitation Clauses in Founder Agreements

When founders sit down to draft their agreement, one of the most sensitive topics is what happens if someone leaves and wants to work on something new. Can a departing founder immediately start a competing company? Can they recruit your best employees? Can they take your clients?

Non-compete and non-solicitation clauses are the legal tools designed to address these concerns. But they're also some of the most misunderstood and frequently misused provisions in startup law. Get them wrong and you could end up with clauses that are either unenforceable or unfairly restrictive.

This guide explains what these clauses actually do, when they're enforceable, and how founders can structure them in a way that's both protective and fair.

What Is a Non-Compete Clause?

A non-compete clause (also called a covenant not to compete or restrictive covenant) is a contractual provision that prevents a person from engaging in a competing business for a specified period of time after leaving the company.

In the context of a founders agreement, a non-compete typically says something like: "For 12 months after departing the company, the departing founder shall not directly or indirectly engage in, own, manage, or participate in any business that competes with the company's business within [geographic area]."

The three key parameters of any non-compete are:

• Duration -- how long the restriction lasts (typically 6 months to 2 years)
• Geographic scope -- where the restriction applies (a city, a state, nationwide, or worldwide)
• Activity scope -- what specific activities or industries are restricted

All three must be reasonable for the clause to be enforceable. A non-compete that's overly broad on any dimension is vulnerable to being struck down by a court.

What Is a Non-Solicitation Clause?

A non-solicitation clause is narrower than a non-compete. Instead of preventing someone from competing entirely, it prevents them from poaching specific relationships -- typically employees and clients.

There are two common types:

Employee Non-Solicitation

This prevents a departing founder from recruiting or hiring the company's employees for a specified period. The language usually covers both direct solicitation ("Come work for my new company") and indirect solicitation (posting a job listing and then specifically encouraging current employees to apply).

Client/Customer Non-Solicitation

This prevents a departing founder from actively soliciting the company's existing clients or customers. It typically doesn't prevent the departing founder from working with those clients if the clients come to them independently -- it only restricts active outreach.

Enforceability: The State-by-State Patchwork

Here's where things get complicated. Non-compete enforceability varies dramatically depending on which state's law governs the agreement. There is no federal standard, and the range runs from complete prohibition to relatively permissive enforcement.

States That Ban or Severely Restrict Non-Competes

California is the most well-known example. Under Business and Professions Code Section 16600, non-compete agreements are void and unenforceable with very limited exceptions (such as the sale of a business). This applies regardless of whether the non-compete was signed in another state -- if the individual works in California, California law generally applies.

Other states with significant restrictions include:

• Oklahoma -- non-competes are largely unenforceable
• North Dakota -- non-competes are generally void
• Minnesota -- banned non-competes effective July 2023
• Colorado -- non-competes are void for most workers, with exceptions for highly compensated employees and certain business sales
• Oregon, Washington, Illinois, Maine, and others -- various restrictions on duration, compensation thresholds, or notice requirements

States That Generally Enforce Reasonable Non-Competes

Many states, including Texas, Florida, Georgia, Massachusetts, and New York, will enforce non-competes that meet a reasonableness standard. Courts in these states typically evaluate:

• Whether the restriction protects a legitimate business interest (trade secrets, client relationships, specialized training)
• Whether the duration is reasonable (usually 1-2 years maximum)
• Whether the geographic scope is reasonable relative to the company's actual market
• Whether the restriction imposes an undue hardship on the departing individual
• Whether the restriction is harmful to the public interest

Some states have a "blue pencil" doctrine that allows courts to modify an overly broad non-compete rather than striking it down entirely. Others take an all-or-nothing approach -- if any part of the non-compete is unreasonable, the whole thing is void.

The FTC and Federal Non-Compete Developments

The regulatory landscape for non-competes has been shifting at the federal level as well. The Federal Trade Commission has taken an active interest in non-compete agreements, signaling a broader trend toward restricting their use.

It's worth noting that the legal landscape around federal non-compete regulation continues to evolve. The FTC's rulemaking process and any resulting legal challenges could significantly change the rules in coming years. Founders should keep an eye on developments and consult with an attorney who stays current on these changes.

Regardless of what happens at the federal level, the state-level patchwork remains the primary framework for enforceability. Your agreement should be drafted with the relevant state law in mind.

What Counts as Reasonable for Founders?

Even in states that enforce non-competes, reasonableness is the key to enforceability. For founders agreements specifically, here's what courts generally consider reasonable:

Duration

• 6 to 12 months is the sweet spot for most founder non-competes. This is long enough to protect the company during a critical transition period but short enough that courts are unlikely to find it oppressive.
• 18 to 24 months is sometimes enforceable, particularly for senior founders with deep knowledge of the company's strategy and trade secrets.
• More than 2 years is rarely enforced and signals that the clause is punitive rather than protective.

Geographic Scope

• For software and internet companies, geographic restrictions are increasingly irrelevant. Courts recognize that a geographic limitation doesn't make sense when the business operates online.
• Instead of geographic scope, many modern non-competes focus on industry scope -- restricting the departing founder from working in the same specific market segment.
• When geographic limits are used, they should correspond to the company's actual market, not an aspirational one.

Activity Scope

• The restriction should be limited to activities that genuinely compete with the company's core business, not a blanket ban on working in the broader industry.
• A departing CTO restricted from building a directly competing product is reasonable. Restricting them from any software engineering role is not.
• Be as specific as possible. "Developing or marketing project management software for enterprise clients" is more enforceable than "working in the technology industry."

When Non-Competes Make Sense for Founders

Not every founders agreement needs a non-compete. Here are situations where they're most justified:

• The company has genuine trade secrets -- proprietary algorithms, unique data sets, or confidential business processes that a competing venture could exploit.
• The founders have deep customer relationships -- particularly in B2B businesses where personal relationships drive revenue and a departing founder could divert significant business.
• The company operates in a niche market -- where a new competitor started by someone with inside knowledge could cause disproportionate damage.
• There's significant venture capital involved -- investors often expect non-compete protections for key founders as a condition of funding.

When They Don't Make Sense

• Very early-stage startups with no revenue, no customers, and no trade secrets. There's nothing to protect yet, and an aggressive non-compete could scare off potential founders.
• When the business is based on publicly available information or executes on a well-known business model. If anyone could start a competing business without inside knowledge, a non-compete adds little value.
• When the company is in a California-law jurisdiction. Rather than including an unenforceable non-compete, focus your protective provisions where California law actually supports them.

Structuring Fair Provisions: Balancing Protection and Fairness

The best non-compete and non-solicitation clauses feel fair to both sides. Here's how to achieve that balance:

Tie Restrictions to Departure Circumstances

Consider varying the restrictive covenants based on how and why the founder departs:

• Voluntary departure -- full non-compete and non-solicitation terms apply
• Involuntary departure without cause -- shorter or no non-compete period (the company chose to end the relationship, so restricting the departing founder's livelihood feels less fair)
• Departure for cause (breach of duty, fraud, etc.) -- full restrictions apply, possibly with extended duration

Provide Consideration

In many states, a non-compete must be supported by adequate consideration -- meaning the person agreeing to it must receive something of value in return. For founders, the equity itself is usually sufficient consideration. But some agreements also include:

• Garden leave provisions -- the company continues to pay the departing founder's salary during the non-compete period
• Lump-sum payments upon departure in exchange for honoring the restrictions
• Accelerated vesting as compensation for the restriction

Keep It Symmetrical

If both founders are signing the same non-compete, it should apply equally. Asymmetric restrictions (one founder is restricted but the other isn't) create resentment and may raise enforceability concerns.

Include a Carve-Out for Different Industries

Make clear that the non-compete only applies to the specific industry or market the company operates in. A departing founder who wants to start a restaurant shouldn't be restricted by a non-compete from their SaaS startup.

Practical Recommendations for Founders

Here's a practical checklist for approaching non-compete and non-solicitation clauses in your founders agreement:

1. Research your state's law on non-compete enforceability before drafting anything. The rules vary enormously and determine what's even worth including.
2. Start with non-solicitation -- it's more likely to be enforceable and addresses the most immediate concerns (losing employees and clients).
3. Keep non-competes narrow and reasonable -- 6-12 months, limited to genuinely competing activities, with scope that matches the company's actual business.
4. Tie restrictions to departure type -- distinguish between voluntary and involuntary departures, and between departures for cause and without cause.
5. Include confidentiality provisions alongside or instead of non-competes. Trade secret protection through NDAs is enforceable in all 50 states, including California.
6. Review and update as the business evolves. A non-compete that was reasonable when the company was pre-revenue might need adjustment when you're doing $10 million in annual recurring revenue.
7. Have an attorney review the final language. Non-compete enforceability is highly fact-specific and depends heavily on precise drafting.

The goal isn't to trap anyone. It's to ensure that if a founder relationship ends, the transition is fair to everyone -- including the company, the remaining founders, and the person who's moving on.

This article is for informational purposes only and does not constitute legal advice. Non-compete and non-solicitation laws vary significantly by jurisdiction and are subject to ongoing legislative and regulatory changes. Consult a qualified attorney licensed in your state before including restrictive covenants in any agreement.