Term Sheet (5) How Non-Competition Clauses Restrict Founders, Non-Conflicting, Non-Solicitation

Venture Capital Terms and Conditions in a Nutshell for Founders to Read and Understand Term Sheet on Their Own ~ I'm Xiaoxiao Liu, a U.S. lawyer.

VCs often sign non-compete agreements before investing to retain the startup team and prevent the founders from leaving the company and engaging in the same or similar business as the company, which will bring losses to the company.

Typical non-compete clauses in Term Sheet are as follows:

Non-Competition Agreements: Each Founder and key employee will enter into a one-year non-competition in a form reasonably acceptable to the Investors.

1. Conceptual Distinctions: Non-Competition,Non-Conflicting,Non-Solicitation

When it comes to non-competition, the most common misunderstanding is that many people will confuse the following concepts:

Non-Competition

Non-Conflicting

Non-Solicitation

And the most commonly confused are the first and the second, Non-Competition means that after leaving the company can not be engaged in the same or similar business in the company, while Non-Conflicting that during the work of the company can not do other things to interfere with the work. So there are two obvious differences between the two, one obvious boundary is the time, Non-Competition is after leaving the company, Non-Conflicting is in the period of employment; the second obvious difference is that Non-Competition business field is the same or similar, while Non-Conflicting is the same or similar business, while Non-Conflicting is the same or similar business, and Non-Conflicting is the same or similar business. The second obvious difference is that the business field of Non-Competition is the same or similar business field, while Non-Conflicting does not limit the field, even if it is completely unrelated business, but because of occupying too much energy to cause the founder can not concentrate on the current company, then it is also not allowed.

a. Non-Competition

For example, Yang Kang took the investment from Quanzhen Capital at the beginning, and then accepted Mei Chaofeng's personal investment to create the cryptocurrency Wanyan Coin in private before he finished his mission as the founder of Wanyan AI, which is a Non-Competition, so even if Yang Kang's project is cryptocurrency Wanyan Coin, it has nothing to do with the cryptocurrency Wanyan Coin, even though he accepted Mei Chaofeng's investment. So even if Yang Kang accepts Mei Chaofeng's investment and does the project of cryptocurrency Wanyan Coin, which has no competition with the AI, but doing Wanyan Coin has already made Yang Kang unmotivated to do his job, and the Wanyan AI invested by Quanzhen Capital has become the state of "Walking Dead", then Non-Conflicting can play a role at this time, and GP Capital of Quanzhen Capital's GPI can play a role in the project. At this point, Non-Conflicting Prohibition can be used to order Yang Kang, the GP of Quanzhen Capital, to stop working outside the company and focus on returning to Wanyan AI, or he can kick Yang Kang out of the company if he realizes that Yang Kang is no longer able to focus on returning to Wanyan AI.

b.Non-Conflicting

If Yang Kang left Wanyan AI, he could have accepted Mei Chaofeng's investment to set up Wanyan Coin, because the business of Wanyan AI and Wanyan Coin are two completely different fields. However, Yang Kang is also burdened with another clause Non-Competition signed with Quanzhen Capital, which means that within one year after Yang Kang left Finished AI, he can no longer do AI similar field of entrepreneurship, then at this time he accepted the investment of West Poison Capital to create Finished Robotic, then we all know that Robotic is also based on artificial intelligence, and this kind of company is also based on artificial intelligence. If he accepts the investment from West Poison Capital and creates Robotic, then we all know that Robotic is also based on AI technology, which is close to the business field of AI, so it is very easy to be claimed by Quanzhen Capital that he has violated Non-Competition.

c.Non-Solicitation

Finally, we will look at Non-Solicitation , this and the other two kinds of difference is relatively large, meaning that a founder gone even if, but also poached other competent generals, which will have lost a founder of the company is absolutely worse. For example, AutoWind, a self-driving project incubated in the Peach Blossom Accelerator under East Evil Capital, has six co-founders: Qu Lingfeng, Chen Xuanfeng, Mei Chaofeng, Lu Chengfeng, Wu Mianfeng, and Feng Mofeng. One of the co-founders, Chen Xuanfeng, left the Accelerator after stealing the company's core code, the Jiuyin Zhenjing, and lured another co-founder, Mei Chaofeng, to leave the company with him, which violated the Non-Solicitation Clause. The clause. Moreover, the GP of East Evil Capital, Mr. Huang Yakeshi, is also more extreme, directly dissolved the entire AutoWind, and also closed down the Peach Blossom Accelerator, so it can be seen that the violation of Non-Solicitation is how much hated behavior.

2.Non-Competition

After saying so many conceptual distinctions, we return to the focus of today's Non-Competition. Non-Competition in fact contains three dimensions. a. Time:

a. Time. In addition to the time we just said is after leaving, there is a length of time, in the legal practice can be seen in 6 months to 24 months have, and the most common is 12 months.

b. Business. This we have just said need to be similar or similar areas, others have left the company, if you do a completely unrelated field, then the original investors should not be prevented.

c. Geographic area. This geographical scope of the terms of the existence of a relatively low, because most of the technology business is actually borderless, so often the geographical scope will be written directly worldwide, or at least the United States, this article is usually nothing to talk about.

3. Effectiveness of Non-Competition in California

One thing that is often questioned is whether Non-Competition is invalid in California. Yes, Non-Competition is invalid in California, but there is an exception, that is, in the case of a company acquisition, the founder can be required to Non-Competition, so it should be said that Non-Competition is subject to great restrictions in California, but not completely invalid.

4. Comparison of Non-Competition in China and the U.S.

Non-Competition is relatively common in China's venture capital provisions, but in the United States this article is actually less common, because in addition to California's restrictions, other states allow non-competition, but there is also a certain degree of restriction, resulting in the U.S. non-competition provisions are actually very difficult to enforce in practice. Putting this clause is also not very enforceable, but also adds to the difficulty of negotiation, so often investors do not want to waste time on this kind of chicken ribs of the clause.

Here is the venture capital terms and conditions of the essence, so that founders read Term Sheet ~ I am the U.S. lawyer Liu Xiaoxiao, we will see you in the next issue.