Non-Compete and Non-Solicitation

Non-compete clauses restrict someone from starting or joining a competing business for a period after leaving. Non-solicitation prevents poaching employees or clients. Enforceability varies dramatically by state. California generally does not enforce non-competes.

Why it matters

These clauses show up in founder agreements, employment contracts, and shareholder agreements. For co-founders, a non-compete prevents a departing founder from immediately launching a competing startup using the knowledge, relationships, and strategies they gained. For the broader team, non-solicitation agreements protect the company from having a departing employee recruit the entire engineering team to their new venture.

However, overly aggressive non-competes can make it impossible for talented people to find work in their field, which is why many states have limited or banned them entirely. A non-compete that is too broad — covering all technology, for two years, in any geography — is likely to be invalidated by a court anyway, giving false protection while creating legal costs.

The most important thing for founders to understand is that these provisions are only as valuable as their enforceability. Before including them in any agreement, founders should consult with an attorney in the relevant state to understand what will actually hold up in court.

How it works

A non-compete clause typically specifies three parameters: what activities are restricted, the geographic scope, and the duration. A reasonable non-compete might prevent a departing founder from working on a directly competing product in the same market for 12 months. Courts generally look for reasonableness when evaluating enforceability.

California is the most notable exception because Business and Professions Code Section 16600 makes most non-compete agreements unenforceable, which is one reason the Silicon Valley startup ecosystem is so dynamic. Several other states, including Colorado, Illinois, and Washington, have also enacted significant restrictions on non-competes.

Non-solicitation agreements are separate and generally more enforceable. They prevent a departing person from actively recruiting current employees or soliciting existing customers for a competing business. A typical non-solicitation period is 12 to 24 months. Even in California, non-solicitation of customers may be enforceable in certain circumstances, though the law continues to evolve. Founders should consult with an attorney in their state before relying on or agreeing to these provisions.

History and origin

Non-compete clauses have roots in English common law, where courts as early as the 17th century grappled with the enforceability of restrictions on trade. The foundational case Mitchel v. Reynolds (1711) established the principle that post-employment restrictions on competition could be enforceable if reasonable in scope and supported by consideration — principles that U.S. courts have applied and refined for centuries.

The use of non-competes in the tech industry grew substantially through the 1980s and 1990s as human capital — and the knowledge workers carried — became the primary competitive asset of many companies. Silicon Valley's decision (through California law) to refuse enforcement of non-competes has been studied by economists as a significant factor in the region's innovation density, as it allowed talent and ideas to flow freely between companies, accelerating the diffusion of knowledge across the ecosystem.

The regulatory landscape shifted significantly in the 2020s. The Federal Trade Commission (FTC) issued a proposed rule in 2023 that would have banned most non-compete agreements at the federal level, though courts subsequently blocked the rule. Multiple states enacted new restrictions on non-competes, and the trend continues toward limiting their use and scope, particularly for lower-wage workers and employees in competitive industries.

Frequently asked questions

What is the difference between a non-compete and a non-solicitation clause?

A non-compete clause restricts a person from working for or starting a competing business after leaving the company. A non-solicitation clause restricts a person from recruiting away current employees or soliciting existing customers for a competing venture. Non-solicitation clauses are generally narrower in scope and more consistently enforceable across states than non-compete clauses.

Are non-compete agreements enforceable in California?

Generally no. California Business and Professions Code Section 16600 makes most non-compete agreements unenforceable for employees, with very limited exceptions such as the sale of a business. This is one reason Silicon Valley has fostered such a dynamic startup ecosystem — engineers and executives can leave one company and immediately start or join a competitor. Startups incorporated in California or with California employees should not rely on non-competes.

Should co-founder agreements include non-compete clauses?

In most cases yes, with the understanding that enforceability depends on the state. A non-compete in a co-founder agreement is meant to prevent a departing founder from immediately launching a directly competing company using proprietary knowledge developed at the startup. Even in states with limited enforceability, having a signed clause creates friction and may deter opportunistic behavior.

How long should a non-compete last?

Courts evaluate non-compete duration as part of a reasonableness test. A 12-month restriction on directly competing activities is generally considered reasonable for most roles. Durations of 2 years or more face increasing scrutiny and are more likely to be modified or invalidated by courts. For co-founders with significant institutional knowledge, 12 to 18 months is a defensible range in states that enforce non-competes.

What makes a non-compete clause enforceable?

Courts generally apply a reasonableness standard: the restriction must be no broader than necessary to protect the company's legitimate business interests. Key factors include the geographic scope (narrower is better), the duration (shorter is better), the scope of restricted activities (specific is better than broad), whether the employee received something of value in exchange, and whether the restriction protects genuine interests like trade secrets or customer relationships.

Are non-solicitation clauses enforceable in California?

Non-solicitation of employees is generally not enforceable in California under the same Section 16600 reasoning that limits non-competes. Non-solicitation of customers has historically been treated differently — California courts sometimes enforce narrow customer non-solicitation provisions — but the law in this area continues to evolve. Startups should not rely on non-solicitation provisions in California without current legal advice.

Do non-compete clauses apply to co-founders differently than employees?

Yes. Non-competes in founder or shareholder agreements are sometimes treated differently by courts because they are seen as part of a commercial transaction (the equity deal) rather than purely an employment restriction. Courts may apply a different reasonableness standard to founder non-competes, particularly in the context of an equity buyout, where the consideration for the restriction is more explicit. An attorney familiar with both employment and corporate law in the relevant state should advise on co-founder non-competes.

Learn more

• Founder agreements: what to include and why each clause matters
• Dead equity: the silent killer of startups
• How to split equity in a startup: the complete guide

Related terms

• Shareholder Agreement
• Founder Equity Split
• IP Assignment
• Operating Agreement