Want to leave your day job to work on your startup idea full-time?
Tips for how and when to do it.
If you are entrepreneurially inclined you will often see opportunities for new products and services as you work your job. These ideas can be better processes, improvements to internal tools or even the opportunity to invent new tools that could transform your employer’s operation, their customers, or suppliers. Naturally, this leads to discontent if you look at your current employer’s business and see a better way – an idea or invention that will make a product faster, better or less expensive – and want to see it happen. These ideas can also come from other employees or customers with a need for a product or service that they cannot get but would be happy to pay for, if it were commercially available.
If that nagging idea has reached the point where you think, “I need to go off and start that business on my own” then let me offer some suggestions for how to evaluate your options. They range from trying an intrapreneurial approach with your current employer to leaving your job and working on your own startup idea full time.
Do you own your idea?
The first question you have to ask is “who owns the invention or new business idea?” If you are working on technology in California the default rule is normally your employer owns it. This is because most companies will have you sign an invention agreement as part of your acceptance of their job offer. By signing it, you have agreed to transfer ownership of any inventions made while you worked for your employer.
However, if there is no agreement, the rules are little more complex. If you’re hired and paid to invent or to be creative, and you invent or think of something creative, your employer owns your creation. Fundamentally, your employer is paying you to think and invent for their industry, so if you think of an idea in that industry, your employer owns it.
If your idea is something that’s not really related to your employer’s business, then they don’t have a claim to it. For example, if you’re the receptionist in a high-tech company, they probably have no claim at all to any software you develop on your own. But if you’re a research scientist in a chemical lab and you invent something related to your employer’s business, your employer is probably going to have a lot of say on who owns it.
Normally, in California high technology firms, there are no ambiguities because they likely asked you to sign some type of invention agreement when you joined the company. These invention agreements often have some type of non-competition agreement when you leave the company. We’ll talk about those in a later, but let’s go back to the invention agreement first. The invention agreement probably says everything you invent for the company belongs to the company.
Under California law, if it’s your time, your tools it’s yours.
Now, in California, the law provides a way out. It says that if you create your invention completely on your own time using your own resources, that invention belongs to you (with some exceptions). If you are relying on this safe harbor provision, be sure to keep a giant wall between your new idea and your employer’s resources. There are court cases where employers have found on the former employee’s laptop product designs and the company said, “Hey. That’s our laptop. They used our tools.” So, the California safe harbor doesn’t apply if you use your employer’s computers. Even their emails! So, if you have a great creative idea and you’re not going to work with your boss, make sure you do all your R&D and your product development on your own time using your own resources.
Are you subject to a non-compete agreement?
If your product or service would compete directly with your employer’s current or contemplated offerings it may be subject to a non-compete agreement you signed when you joined the company.
The good news in California is that non-compete agreements are generally not enforceable as a rule. They’re enforceable in minor circumstances or special categories, like if you’re one of the co-founders of the original company, or you have some unique abilities or skills, then the courts might find that a non-compete agreement is valid. Normally, a non-compete agreement may be invalidated by the courts. Courts frown on restricting a person from working, thus you’re free to go sell your labor to anyone you want to sell your labor to. This is good for you because it lets you leave the current employer and continue to work in the industry of your expertise. The only legal issue to settle is whether your employer owns the idea as discussed above.
If you are subject to a non-compete agreement, the non-compete period can give you a window of opportunity to plan for your new business from when you leave the business until you start your own business. One of our clients was the co-founder of the company and as part of his separation agreement he agreed to a one year non-compete period. During that period, he developed the product that he was going to sell and when the year was over, he applied for patents and went live with the new business. He took the non-compete year as an opportunity to do product development, which is a clever idea. So, if you have a non-compete agreement you can’t get away from, then it might be easier not to fight it and just use that period for product development. As long as you’re not competing with your employer during that time, you’re probably going to be okay.
If you have a generic non-compete agreement and you aren’t really one of those employees in the special categories, you don’t have to worry about it. It doesn’t apply, you’re free to go start your own business. If you aren’t sure, then speak with an attorney for some guidance.
Should you get your employer’s permission to start another company?
It would be ideal if you could work with your present boss on your idea to start your own business as an offshoot or “skunk works” and leave your day job with your company’s permission. Your current employer, might have an interest in your new that business. We’ve seen this happen a few times, but it’s rare, mostly because once you say, “I want to leave my day job,” your company says, “Okay. You’re no longer one of us and are no longer part of our team.” You suddenly become an outsider. This might be managed better by putting out feelers to gauge their reaction before making the offer. A clever person might even get their boss to suggest the idea for you.
In any event, you should be willing to “pull the trigger” before you approach your present company about leaving. If they aren’t interested in working with you on your new business idea, you’re soon going to be out the door, so be prepared.
You may also run afoul of the “not Invented here syndrome” where they may not want to consider external solutions, but would prefer to only consider internally developed solutions. It’s been our experience that designers and marketing people have many products or improvements they would like to develop, however obtaining the necessary resources from their employer is difficult if not impossible to do. Yet they still hope that someday they might be able to do them, to “invent them here”. In the battle for resources, there are simply too many opportunities and not enough money.
Perhaps your company chooses to develop products with the highest rate of return, leaving many potential products in the waste bin. Those products might have had the potential to be good businesses, but just not a fit for the company at the present time.
So, the question becomes “How do you get out of here legally”? Well, the first way I mentioned was see if you can work with your boss. If your boss will help you out, that’s great. Option two is to partner with others who can get started while you keep your day job. Finally, you’re out the door on your own.
When to go public with your idea? How to stay in stealth mode until you do.
There are some things you might want to do as you’re starting up if you’re not yet ready to go public with your invention. There are several things you can do.
If it’s a type of invention that you are likely to patent, you should know a provisional patent application is not disclosed to the public for 18 months. You can apply for a patent knowing that you have an 18-month period before the public finds out that your name is on that patent, which is a pretty good run time for an idea. Patents are a little different from trademarks. If you have a trademark, it’s public information right away because you put it in a database and the public has a right to comment on it.
Starting your new business as a corporation or LLC might be a good tool for staying in stealth mode because everything is then done in the name of the company and your name isn’t associated with the corporation or LLC. Having a corporate entity helps with trademarks, because the trademark filings will be in the name of the corporation.
With a corporation, you may own most of the stock, but a minority stockholder might be the president of the company. Corporations in California are required to file a statement of who the managers are, but you don’t have to be on that statement. It could be anyone – a spouse, relative or friend, who might be the legal head of the business – especially when you’re in stealth mode doing your product development before you’re ready to go public.
If you wait too long to start your own company, you may go “stale”. You need to maintain contacts and your domain knowledge, so don’t stay in stealth mode too long. To know if your idea will succeed, you need to start selling. The sooner, the better.
Is your employer one of many potential customers?
Sooner or later, if you’re in an industry and you leave to start a business in that industry, everyone’s going to know about it. Make sure you own your own intellectual property and that you developed it after you left your employer. That way you won’t have any troublesome issues with your prior employer. Often your prior employer may be a good candidate for selling your new product. You would hate to walk away from your first big sale, which could be your prior employer, if you have a product that was designed to fill a need that your prior employer has. You want to be able to go back and approach them for a sale.
Also, your current employer might be a good source of funding. Once you’re out the door and once you’re on your own, they might be a good partner for bringing a product to market or to gain access to markets you don’t already have. Maybe they would want to rebrand it or resell it (i.e. licensing). You have a fairly good situation because you’re not asking them to spend any R&D money. You’re just saying that we can we put this in your product line, we can sell this together, or we can work together some other way. It’s the mustard to their hot dog, as they say. They may be interested in working with you, especially if you left that company on good terms.
Even if your current employer doesn’t become a business partner or doesn’t become a customer of your future business, the people you work with in industry understand that industry. It is a powerful competitive advantage to have a network of people in your industry who know about you and what you’re doing and it can be a good channel for you to sell as well. Of course, you don’t want them to think you stole something from your boss, and therefore it’s important to own your invention and your business idea cleanly. Then you’re free to sell to all the people you know who are in that business, technology or industry.
How to build a relationship with an attorney?
Finally, it’s a good idea to check with an attorney before you get too far down the road. The time to hire an attorney is before you need an attorney. So, if you’re thinking about leaving your day job, grab a copy of your employment agreement, talk to an attorney and see about your obligations. An attorney can compare your proposed business idea with what you’re doing. Get a little guidance for the cleanest way to leave and how best to stay in stealth mode. Instead of trying to guess what your boss is going to do, talk with an attorney to know what your rights are, before you need it.
Having domain expertise is one of the best tools you can have when you start a business because you know what the market is already. If it’s the type of thing that you’re involved in with your current job, you already know there’s a demand because it’s the type of product you would want when you were doing it. If you can handle the market risk, the legal risk should be relatively small. So, talk to your attorney early and find out what you have to do to cleanly make a break from your day job. Then go for it and be successful.