A non-compete clause in an investment agreement is a provision that restricts the ability of certain parties involved in the agreement, such as the founders, key employees, and sometimes the investors themselves, from entering into or starting a similar business or profession in competition against the company. The intent is to protect the company’s business interests by preventing the diffusion of sensitive information or the siphoning off of customers, clients, or staff by individuals who could use their inside knowledge or influence to the company’s detriment.
Here’s what typically is outlined in a non-compete clause:
- Duration: The time period during which the restricted party must not engage in competing activities. This can range from a few months to several years, but must be reasonable to be enforceable.
- Geographic Scope: The geographic area where the restricted party is prohibited from competing. This must also be reasonable and can range from a specific city to a broader region or country.
- Scope of Restricted Activities: The specific types of businesses or activities that are considered competing. This needs to be clearly defined to prevent any ambiguity.
- Exemptions: Certain activities may be exempted from the non-compete, allowing the restricted party to engage in some form of business that does not directly compete with the company.
- Penalties for Breach: The consequences if the restricted party violates the non-compete clause. This can include financial penalties, the obligation to cease the competing activity, and potential legal action.
- Buyout Option: In some cases, there might be a provision that allows the restricted party to pay a certain sum to “buy out” of the non-compete restriction.
For an investment agreement, a non-compete clause serves to reassure investors that the valuable assets of the company, including its intellectual property and trade secrets, won’t be leveraged by the insiders to start a competing business. It protects the investors’ interests by ensuring that the company retains its competitive position and that the investment is not diminished by preventable competition.