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Smart Answers for Entrepreneurs

Negotiate a Partnership with a Former Employer

Several months ago, I proposed an alternative business model to my employer, one of two major companies in a large and profitable industry. They elected not to pursue it because they are deeply entrenched in their current business model and cannot take the risk. I’m considering approaching the principals and asking to be released from my noncompete and employment agreements so I can pursue investors to start a new company around my idea. In exchange, I would propose some kind of silent partner agreement with the current company. Obviously, this is a situation where there is no going back, once I initiate the conversation. Can you share any advice?
—J.D., Kansas City, Mo.

Assuming your new company will compete directly with your current employer, you are smart to include it from the beginning. “It seems pretty clear that there is no new business here unless the current employer is on board somehow,” says Alan S. Gutterman, an attorney and principal at Gutterman Law & Business, a legal consulting and business training service in Piedmont, Calif.

Since you’ll be relying on ideas and information to which your current employer could claim ownership rights, you could face significant problems if you go off on your own with a business model related to the technology, business practices, or customers of your employer. Also, your current employer will likely need to participate in the due diligence process with investors. Unless you’ll be funding the company yourself, any outside investors will want to know about your employer’s status. “They won’t be satisfied with vague statements like ‘I have a silent partner lined up that will deliver me the technology as soon as the money comes in,’” Gutterman says.

Start by talking to an attorney familiar with the legal restrictions that you may need to overcome to move forward with your idea. Get a good idea about the extent to which any agreements you signed are enforceable in your state and how long they may apply after your employment with this company ends. Some noncompete agreements, for instance, apply for a year or two after you leave the business.

If your idea involves a product or technology on which your current employer holds a patent or other intellectual property protection, you also should talk to an intellectual property attorney.

Along with your employment contract and the noncompete agreement you mention, employees owe certain general duties to their employers in most states. “The scope of the duty and its impact on any new venture that the employee intends to pursue will depend on a variety of things, such as whether the employee is deemed a skilled or unskilled employee and what kind of new business is being established,” Gutterman says.

Once you’ve sorted a pathway through any legal obstacles, you and your attorney should devise a simple ownership and management model for your new company that includes a role for your current employer. For instance, your employer might license some intellectual property to your new venture or it might make a financial commitment, either in cash or facilities and expertise. Your employer also needs to be secure about just how large a commitment it will be required to make. If the employer is to be a significant—and named—strategic partner for your new company, there may be concern that this will take too much time away from the current business.

In order to overcome these hesitations, you’ll need to build in some incentives for your employer: This could entail an equity interest in your new company, a percentage of sales or perhaps a royalty, depending on the type of business you’re doing, says C. Dickinson Hill, a Los Angeles business attorney. Your employer’s receptiveness will probably depend on your business idea. “If the alternative business model would be expansive rather than directly competitive, the company may be happy to accept some interest in it and encourage its development,” Hill says. “If the alternative model would be directly competitive, there are greater risks to the company.” In that case, you should expect greater reluctance from your employer.

Don’t go in with a combative mindset, however. Present your proposal as an opportunity for your employer to reap the benefits of the alternative model it cannot pursue in-house. If you take on the risk the employer reluctant to assume and provide it with reasonable incentives in exchange for permission and participation, you’re more likely to bring the employer on board and focused on the upside. Remember that almost anything can be negotiated in business. If the deal can be made attractive, your employer should be willing to work with you. After all, it hired you and obviously has some confidence in you as an employee.

What you don’t want to do is storm off and put yourself into an adversarial position. “It goes without saying that an angry former employer—with resources and a reasonable legal basis to object—can stop a new business dead in its tracks,” Gutterman warns.

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

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