By: William J. O’Sullivan
It happens more often than you think: employees stealing the owner’s company. Not stealing from the company. Stealing the company. Could it happen to you?
Picture this real-world scenario. An entrepreneur starts a new business. Early on, she hires a talented go-getter and puts him into sales. E takes G under her wing, teaches him the business and introduces him to people in the industry. G is eager to learn and willing to work hard.
E and G put in long hours to get the business off the ground. At the same time, E invests a great deal of time in G’s professional development. Their relationship evolves into one of mentor and mentee, and E comes to have complete trust and confidence in G.
G is a quick learner, and before long he develops a large and loyal customer base of his own. One day, while G is walking past the bookkeeper’s desk, the bookkeeper calls out to him, “Hey, G, look at this. Last quarter you billed more than E did.”
The wheels start to turn. G thinks, “This isn’t right. Why am I working for a paycheck when I could be doing this for myself?” But then he admonishes himself. “I can’t do that. E taught me the business. That wouldn’t be right.”
So he marches over to E’s office. He recites his accomplishments, points out his big contribution to the bottom line, and tells E that he wants a piece of equity. E is shocked at the very suggestion. E points out that she started the business, put her own assets at risk, and taught G everything he knows. “When I’m ready for a business partner, I’ll let you know,” E declares. End of meeting.
Three weeks later, E opens the office on a Monday morning. The office is oddly quiet. She walks over to G’s cubicle, and finds that G’s personal effects are gone and his desk is clear. A stack of customer files is missing. So are two other sales reps. By the end of the day, E learns that G has set up a business identical to hers, and is aggressively working the customer list. Sales for E’s company immediately decline by 60%.
Business litigators encounter this type of situation more often than you may think. Few things are more devastating to a small-business owner. Aside from the financial hit, the owner has to cope with a profound sense of betrayal – first and foremost by his departed mentee, but also by the employees and customers who follow.
If your company’s success is heavily dependent on one or two superstar employees, you may be vulnerable. Here are three things you should consider doing to reduce the risk.
- Have an open mind about taking on partners.
When a person creates a new business on his own, one of his prime motivators typically is to be “independent.” On day one, “independent” means “I own the whole business.”
Unfortunately, many owners turn the equation around to say, “I own the whole business; therefore, I’m independent.” Unless you are literally the whole company, you may be kidding yourself if you believe that. Look around you. If your company’s success rests heavily on some key employees, you’re not independent, no matter who owns the company. If they are people who you enjoy working with, and if they would present a serious threat to you as competitors, think about the pros and cons of offering them equity stakes in the company.
- Use narrowly tailored non-competes.
Another way to protect yourself is by having your key employees sign well-drafted non-competition agreements. Most judges will enforce a non-compete only if the company provides the employee with something of value in exchange. Also, the non-compete should be narrowly tailored to protect the company’s legitimate interests without unfairly limiting the employee’s ability to pursue his livelihood. It may seem paradoxical, but under Connecticut law the tougher and more onerous a non-compete is, the better the odds that a court will refuse to enforce it.
- Protect your trade secrets.
Take reasonable measures to protect your company’s proprietary information. If you do, to the point that the information qualifies as “trade secrets,” you will have legal ammunition against employees who try to take your data for the benefit of themselves or your competitors. A well-drafted confidentiality agreement can be quite helpful in this regard.
One of the keys to running a successful business is anticipating and addressing problems before they develop. Think about these points, and get good legal advice before you think you need it.