Working On Your Startup In Stealth-mode While Being Employed? Know the Legal Side of It.

It takes time from ideation to actual execution. Those who are employed many a time would like to have the cushion of a monthly salary when still perfecting the idea and getting close to execution, so that the bills can be covered while attempting to establish a client base. However, there are legal issues to be aware of when starting on your own while still being in an employer-employee relationship.

While most of the below is common sense, it still happens to be top 5 mistakes startup entrepreneurs commit. Interestingly, I get this question during most startup events.

The employer-employee relationship has certain well entrenched doctrines, from Intellectual Property laws to labor laws. All IP generated by the employee ‘during the course of employment’ belongs to the employer or the fact that an employee, specially key employees cannot operate a competing business. An employee must not only check the employment agreement and employment policies but be aware of these doctrines.

Speak with your employer: I believe it should be your mandatory task, to discuss with your employer on the business you want to pursue (ensure that you do not mis-represent) and check if there are any issues. Honesty is still the best policy.

Some companies have restrictions / disclosures required on holding board positions or substantial ownership. It is best to be upfront and transparent, rather than daring a law-suit or losing IP.

Moonlighting: Some organizations have zero tolerance to moon-lighting, while some are ok as long as it does not hamper productivity, not in the same domain / area of work and not utilize company’s resources. Even if you are working on your startup on personal time including phone calls / emails and ensure it is a different business from that of your employer, but then if you are tired all the time, it still means that you are not a very productive employee.

Conflict of interest: Multiplicity of interests clouds the right decision making. Ethical impropriety is hard to define and the best way to deal it is to avoid it.

Company’s trade secrets belong to the company and can be used during employment only for the benefit of the company. Misappropriation by memory is the most difficult to defend. Adequate disclosures may not be the best plan for mitigation of risk either.

You must have heard before that the IP creation for your startup is like being pregnant (IP creation) while being married to someone else (the employer). It raises ownership issues and other legal rights.

For example, Free Software Foundation (FSF) explicitly requires its contributors to execute copyright assignment stating that the software belongs to FSF, primarily to avoid contributor’s employer claiming ownership rights later.

Check the employment policy for Cooling off period where an employer may prohibit the employee from pursuing the same/similar business. The belief is that with the time lag the memory fades or the trade secret the employee had stales. Many of the points made here can’t be patched up later. You should not only strip everything that belongs to your employer but also be perceived to be not using anything that belongs to the employer. It costs much less in terms of time and money to get it right at the beginning that trying to sort it out later.

[Guest article by Sharda Balaji, founder of, a legal consulting firm.]


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