Startups

Can my new employer take legal action if I have a secret start-up?

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The Question

I have been offered a great consulting role which will require me to work 60 hours a week. I’d like to accept. But six months ago I founded a startup with a friend. So far, it has not been particularly time-intensive. Should I tell the consulting company about the startup before I accept the offer? There is a clause in my contract that states I need to give my full effort, time and attention to the company. There’s only a small chance that they could find out about the startup some time in the future, but if they do, could they take legal action? If I do disclose the startup, I am concerned that the consultancy will question my commitment to the practice and might not hire me. What should I do?

The First Answer

Peter Caven, managing director, Launched Careers, Toronto

Your reputation is one of, if not the most valuable assets you have – you must preserve it. Once it is besmirched, it is very difficult, if not impossible, to restore. There is misrepresentation by commission and omission – not advising the consulting firm of your side hustle is the latter. In this digital world, it should be assumed that the consulting firm will learn of your side hustle. If you are terminated for that reason, it will become known. You will have to say something to your network. Potential employers may contact the consulting company to find out what happened.

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The simplest solution is to exit the startup. Do it formally and officially. Advise the consulting company that you have been involved with the startup and have ended your involvement.

Another option is to advise the consulting company of the startup and your role as a founder. Tell them that you understand their need for a commitment from you. Tell them that you will not conduct any business related to the startup during any time that you are working for them. Ask the consultancy if they are comfortable with the foregoing and if they would like to add any conditions. Advise them that you are willing to exit the startup if that is a barrier to your employment at the firm. If they are not comfortable with your continuing with the startup you will have to make a decision.

The Second Answer

George Huang, partner, Guardian Law Group LLP, Calgary

Generally, a key employee has a fiduciary duty to their employer. Key employees usually involve those of the upper echelon of management or responsibility. This duty includes devoting full-time, ability and energy to furthering the best interests of the employer. It requires the employee to avoid putting themselves in a position where their own interests would be higher than their employer’s interests. There is also the duty to be open, honest and forthright regarding the employee’s other business interests, especially if they are conflicting with the employee’s ability to fully complete his duties for the employer. If you are a key employee, the duties are greater and so are the risks of non-disclosure.

Furthermore, you may be terminated for cause if your startup competes with your employer because you can be using your employer’s resources for your own start-up’s benefit.

If you end up doing more work for the startup and use time that you are supposed to be working for your employer instead of working on your startup, there could be legal recourse.

If it is determined that you are not a key employee, the startup does not compete with your employer and you do not work on your startup during the time you are to be working for your employer, then your employer is unlikely able to terminate you for just cause for non-disclosure of your startup. You will want to consult for further legal advice if your responses to the above factors are mixed.

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