A non-compete clause is a contractual agreement that prevents someone from working for competitors or starting a competing business for a specified period after leaving their current role or selling their company.
A non-compete clause typically specifies three key elements: the duration (how long it lasts), the geographic area where it applies, and the specific activities or industries that are restricted.
For example, you might be prevented from starting a similar business within a 50-mile radius for 12 months.
Courts generally only enforce these clauses if they're considered reasonable in scope and duration.
Companies use non-compete clauses to protect their confidential information, trade secrets, and client relationships from being used against them by former employees or business sellers.
They're particularly common in industries where specialised knowledge or customer relationships are crucial to competitive advantage.
These clauses help businesses safeguard their investment in training employees and developing proprietary systems.
Non-compete clauses aren't automatically enforceable just because you've signed them.
Courts assess whether the restrictions are reasonable and necessary to protect legitimate business interests.
Overly broad clauses - covering too long a period, too wide a geographic area, or too many types of work - may be struck down or reduced in scope.
A non-compete clause prevents you from working in a competing business altogether, whilst a non-solicitation clause only stops you from actively pursuing the former company's clients or employees.
Non-solicitation clauses are generally seen as less restrictive and more likely to be enforced.
Many contracts contain both types of clauses working together.
Founders should pay particular attention to non-compete clauses when hiring key employees who've worked for competitors, as these clauses might limit what they can actually do.
Similarly, when selling your business, carefully negotiate any non-compete terms to ensure they don't unreasonably prevent you from future entrepreneurial activities.
The period immediately after a business sale is often when founders have the most energy and ideas for new ventures.
Investors often scrutinise whether founders or key team members are bound by non-compete clauses from previous employment, as this could create legal risks for the new venture.
If a non-compete clause is too restrictive, it might discourage investment or require the business to pivot its focus.
Always disclose any existing non-compete obligations during fundraising conversations to avoid complications later.
