Primary founder has conflict of interest but wants to retain equity position without quitting day job?


2

I am the primary founder of my start up. We have just received our first influx of capital. My current employer feels working on this would be a conflict. The start up has a management team in place and we can continue without me being named a director, adviser or board member.

However, my current employer COI policy states:

I cannot own a "substantial financial interest" in a company that competes with, does business with or acts as a vendor of my current employer.
My startup actually will be a vendor to companies in my current employers field (and possibly my current employer).

I am willing to not be named on paper anywhere as my start up actually starts up. The problem is how do I retain a significant equity position that does not conflict with my employers policy, nor put undue risk on the startup as investors consider investing in the startup?

If I have an arrangement to be awarded stock at a later date when I join the startup (if and when it takes off and can replace my current salary) I will then have to pay taxes on that grant whereas all the managers of the start up I brought in won't have to pay those taxes.

How can I avoid this and keep my equity? Any help would be great.

Equity Founders Agreement Conflict Of Interest

asked Jul 7 '12 at 07:53
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Dan
11 points

2 Answers


2

Here is now I view your options;

Go adhead being a director of the new company despite it being in breach of your contract Your employer will probably never know. Just make sure you don't draw attention to it and you should be fine. This is the course of action I would take but I don't really want to recommend it to anyone else as you put yourself at a risk of legal action.

Ask your employer for permission to have a financial interest in this new company. You know best how your company might receive this request. If it really is non competing your company might be happy to give their blessing although many would receive the request badly and you could endanger your job.

Quit your current job. This could be a good course if you have money to spare. Still I genrally wouldent recomend quiting your full time job till your new company is making a significant profit.

Abandon the startup. The safe but boring option. Obviously people on this site would advise against this option :)

answered Jul 7 '12 at 09:45
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Tom Squires
1,047 points
  • Tom - thanks for the answers above. I have considered all those options and there are a few issues with each option. If I stay, it is in the direct industry of my current employer and we would be calling on them so they would likely find out thru industry news. I have asked my employer in vague terms and they did feel like it would be a conflict (very conservative company). And I don't have the funds to live on for a prolonged period so quitting is not an option. And, we have already received $200k from investors so abandoning the startup not an option either. – Dan 8 years ago
  • I just outlined the options, you need to pick one. As i said i would go for option 1, you unlikely to have anything worse that getting fired. Still its ultimately your call. Good luck and have fun! – Tom Squires 8 years ago

1

Tom, outlines the options pretty well. One point to consider is whether you can still comply with your company's COI policy.

To do that your startup must not (1) compete with, (2) do business with, or (3) act as a vendor of your current employer. You state that your startup will be a vendor to companies in your employer's space, but this is not necessarily a violation of the three requirements above.

For example, if your startup sells transistors and your employer sells radios, then your startup would be a potential vendor to your employer. However, you would not be a competitor since your employer does not sell transistors. In this situation, it looks like you could sell transistors to other companies as long as you didn't sell transistors to your employer.

One more thing to consider. Even if you don't violate the COI, if your employer is unhappy with you having an interest in this startup on the side, they can probably fire you anyway (in the US at least) since you are probably an "at will" employee.

If your startup would be competing with your employer so you would be violating the COI, then don't waste your time playing games like having a right to own stock in the future. Having a right to own stock in the future is still a "financial interest."

answered Jul 7 '12 at 22:56
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Kekito
1,936 points
  • Thanks Kekito. we have received funding and are moving forward. Our startup will be calling on my current employer (as a vendor) and if we are a vendor to a competitor my employercould see that as facilitating competion so would be an issue with COI. Our current option is for me to not be named as an agent but for the start up to have in their charter the option to offer me a future role in the company for X percent (my equity agreed with the mgt team). This way if it does take off I can join later - but I may have a big tax bill T joining based on valuation. Another ideas? – Dan 8 years ago

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Equity Founders Agreement Conflict Of Interest