Can I Start a Startup While Employed?

A full-time employee is thinking about eventually leaving her current gig to start her own company. She has an idea and wants to start working on it in her free time, testing the waters before quitting and pursuing it full-time. Is moonlighting ok here, legally-speaking? Like most legal questions, there isn’t a black and white, yes/no answer that applies to everyone, but here are some key considerations:

IP Ownership

Amidst typical employment paperwork, the employee probably signed an invention assignment agreement, assigning ownership of all discoveries and inventions she makes on the job to her employer, (with the exception of any inventions the employee specifically disclosed as carve-outs in the agreement). These kinds of IP assignment provisions tend to have a broad scope - exactly how broad depends on the jurisdiction. Certain jurisdictions allow essentially any IP developed while employed to be assigned to the employer - even at home, on a personal computer, and after hours. In California, there are some constraints on employers to enable people to pursue independent side-projects. Under California Labor Code 2870-2872, an employer cannot lay claim to IP developed by an employee that is unrelated to the company’s current or prospective business and developed outside of working hours and without using an company resources or equipment.

If an employee does end up creating IP that is assigned to the company, it’s possible to rewrite code to cleanse copyright issues such that she will have something usable and non-infringing, though this can still be a significant setback. If other IP like trade secrets or patentable processes are assigned to the employer, it can be even more problematic.

Conflict of Interest

The other main consideration is the employer’s conflict of interest policy, which will aim to limit its employees’ involvement with the competition. If the employees side startup is in the same space, this could be problematic. Conflict policies vary -- generally, it would not be permissible to be an employee of competitive company. Holding substantial stock of a competitor could also be problematic. Other potential conflicts include serving as an advisor, director, or consultant. For example, some companies may require prior approval before serving in such roles. Conflict of Interest policies are terms of employment, so an employee who violates them could be subject to termination, although the policy itself will not jeopardize the startup.

Related Pages:

Can I Start a Startup While Employed?
Intellectual Property Ownership and Assignment