Non-Compete Reform in MA: Let's Get Ready to Rumble!

Well, it finally happened. After a nearly decade-long battle, MA has enacted legislation which limits the use, scope and enforceability of non-competition agreements. The new law will go into effective on October 1, 2018, meaning employers have a short window to start preparing now to protect their business interests moving forward as it relates to restricting its (future) former service providers from entering into or starting competing businesses. So if you have founded a started or are planning on doing so and intend on including a non-compete provision for the co-founding team, new hires or engaged consultants, keep reading…..

Starting with the least “headliner” of the headliners: the new law imposes a strict 1 year post-termination time limit on non-competition agreements with any longer period being considered invalid and unenforceable. As pointed out by the tech/VC community, including the NVCA, this does little by way of changing the status quo as the strict nature of this temporal limit is already aligned with the Massachusetts courts’ current approach as well as most tech companies in this region.

But here is where the novelty starts to heat up: The new law requires that the non-compete must be supported by continued payment of at least 50% of base salary during the restricted period or “other mutually-agreed upon consideration.” This is a monumental deviation from the status quo and a requirement which is at the core of the state’s attempt to put a quantifiable $ price on restricting continued innovation and competition in the marketplace.

And then there is this: the new law provides that non-competes cannot be enforced against an employee who is terminated without cause if it is entered into other than in connection with employment termination. This blew my socks off as it is almost always the case (outside egregious circumstances) that employment lawyers advise their clients to terminate high ranking employees without cause or otherwise open your company up to litigation. So now a company may find themselves in the difficult position of deciding whether to fire without cause (and risk an existing non-compete from not being enforceable) or fire with cause (and risk finding yourself in a lawsuit).

And just in case you thought you could rely on your old form non-compete or procedures for on-boarding a new employee: You were wrong. The employer must now comply with new procedural rules in connection with signing a non-compete. Specifically, if signed before the commencement of employment, the agreement containing the non-compete must have been provided to the employee either before a formal offer of employment is made or 10 business days before the commencement of the employee's employment, whichever comes first.

So where does this leave you, employer? Undoubtedly in a less powerful position when instituting and enforcing non-competes, which is a big win for employees and innovation within this state. As we await for things to unfold in practice and through the courts, at a minimum, employers need to take the time to revisit their form on-boarding materials/procedures with their attorney to ensure compliance with the new law. Otherwise, risk looking like a dinosaur….perhaps with a new competitor!

NVCA Model Docs....times are a changin'

For the first time since 2014, the National Venture Capital Association, or NVCA, has updated its model financing documents to reflect a handful of key updates in order to account for the changing world over the past 4 years. In particular, two updates really stuck out which emphasize the times we live in:

Blocks on Crypto-Currency offerings

A new protective blocking right has been added to the model charter to provide investors a veto over token, crypto-currency and block chain related offerings given that the pre-existing veto rights did not clearly apply to or cover these new types of offerings. Without the change, existing investors may have been exposed to a portfolio company circumventing the standard block on future financings by pursuing alternative crypto offerings.  
 
Anti-Harassment/Code of Conduct

A covenant has been added to the model IRA that requires the company to adopt a code of conduct governing appropriate workplace behavior and a policy prohibiting discrimination and harassment at the company. Previously, the covenants contained in the form financing documents had never gone so far as obligating the company to adopt employee handbooks, particular policies, etc. To ease the pain and cost for companies, the NVCA published a sample HR policy to address this point. This is a welcome change for the tech/VC industry and emphasizes the issues that have plagued the community the past couple years.

Kudos to the association and its general counsel advisory board!

Employee vs Consultant Classification – Does it really matter for stealth mode start-ups?

You can find plenty of literature on worker misclassification and the topic couldn’t be hotter in light of Uber’s business model (and high profile litigation). But for you early stage founders starting companies which are expected to be in stealth mode for the foreseeable future, you might be asking yourselves two questions:

1.       Is this something I need to really worry about given the company’s early stage and low profile?

2.       How would a misclassification actually come to light?

The following example, comes by way of anecdote from an on-boarding client (fictitious names used), and serves to answer those questions:

Robin is starting a company and decides to bring on her first employee and dear friend, Brian. With the understanding that they don’t have money right out of the gate, they get comfortable with the idea that they will each start as a “consultant,” and save some money by not setting up payroll while they see if they can get this idea off the ground. 1 year in they are ready to close on their first investor money but over the past couple months Brian has gotten side tracked with another venture and isn’t pulling his weight so Robin decides to fire Brian. Brian, being a recent college graduate, decides to file for unemployment. 3 months later, Robin receives a notice in the mail from the Massachusetts department of labor informing Robin that Brian had been misclassified as a consultant and Robin owes payment to cover the unemployment taxes she should have been withholding while Brian was technically employed by the company. Panic ensues. And Robin starts looking for a new attorney.  

The moral of the story? It is critical for founders of start-ups to classify their service providers appropriately, right out of the gate, regardless of size, reach, publicity or development. Otherwise, risk getting bit in the a**.