The Pitfalls of Moonlighting in a Day Job for Startup Founders

Many, if not most, founders have difficulty affording to work full-time for their startup right from the start. But working a day job while moonlighting at your venture presents some particularly dicey legal issues that can cause issues down the line.

In particular, moonlighting for your startup presents a significant threat to your startup’s intellectual property, especially if you’re currently working at a technology company. Many employers, especially technology companies and other IP-intensive businesses, require all employees to sign invention assignment agreements, which are often very broad and give your employer rights to any IP you create that relates to the business of your employer or any reasonably anticipated business of your employer. This is the case even if the IP was created on your own time and without the use of your employer’s facilities.

While your employer is unlikely to assert any rights to this IP while your startup is small, if your startup were to ever succeed and there is significant money on the line, your previous employer may assert a claim to your company’s IP at that point. Even before then, there is potential for problems. Any potential investors will likely flag the issue during due diligence, and if they find that your old employer may have a claim against your startup’s IP, they are likely to pass on the investment. Incidentally, if you’d like to see a rather funny but surprisingly accurate dramatization of how this exact issue can play out, watch Season 2 of HBO’s Silicon Valley.

So what should new startup founders who find themselves in this position do? Realistically, you have the following two options:

1. Get Permission. You can get permission from your employer. This may not be available to everyone, but if it is possible, it may be effective at neutralizing the issue. With that said, the “permission” needs to be in writing and far more than simple permission. It needs to be an amendment to your current agreement and should be reviewed by legal counsel.

2. Leave ASAP. For many, option 1 is simply not realistic or is simply too risky because you’d be tipping off your employer about your plans to leave. In this case, the sooner you leave and create a clean break, the better. The more of your ideas you develop while working for your employer, the stronger your employer’s potential claim may get. If there is an overlap, you should have your legal counsel review your current agreement, avoid working on your startup at all during working hours and on any of the employer’s equipment (including any employer-provided cell phone or laptop), and keep good records of all of this.

There is no magic formula that can make this issue simply go away, but good planning is crucial here. The startup founder that thinks of these things early greatly increases the chance of protecting the future potential and fundability of their venture.

This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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Alexander J. Davie

Alexander J. Davie

Alexander Davie is a corporate and securities attorney based in Nashville, Tennessee. Businesses of many varieties rely on his counsel and judgment throughout all stages of their growth. In particular, fund managers and investment management professionals seek the expertise Alex gained when he served as general counsel to a private investment fund. Alex also has significant experience and enjoys working with companies and entrepreneurial ventures, especially within the technology industry. As a believer in technology's ability to enrich people's lives and allowing people to connect with each other in new ways, he is passionate about helping tech startups achieve success. He is active in Nashville's startup community as a mentor at the Nashville Entrepreneur Center and participates in numerous other events geared towards making Nashville a nationally ranked location for starting a business.

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