Prospective partner refuses to sign no-compete as person


6

After much search, it seemed that I have found a suitable partner for my IP based startup. Things seemed to have progressed well until I asked him to sign a no-compete agreement as part of the deal. He agreed but insisted that he will sign it only as the authorized agent of his single-member LLC, instead of himself.

He initially claimed that this is better for me, because his LLC has liability insurance of up to 13 million dollars, so if anything goes wrong, I can actually get something if I sue him.

But when I said that I am fine with having him personally sign the agreement (despite the insurance his LLC has), he replied that he is not willing to sign the agreement personally.

If you were in my situation, would you go with his proposal? or run away from him as fast as you can?

Please explain the reason for your answer since I am still trying to make sense of unspoken rules of business world as a totally fresh starter.

Thank you,

Glen

LLC Agreements Liability

asked Mar 21 '11 at 03:55
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Glen
31 points

6 Answers


5

One of you is likely over complicating things.

Hard to say which one, but my guess is with him.

His LLC is insured. He can also dissolve it easily, leaving you trying to collect from a vaporized entity.

Think long and hard about this one. Early interactions can be indicators of what future business discussions will be like.

answered Mar 21 '11 at 07:21
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Brian Karas
3,407 points
  • That last sentence is the key part. If this is complicated..... – Nick 8 years ago

3

You're not going to waste your time or money enforcing it anyway, so what do you care?

Either you trust him, or you don't. Based on the fact you asked this question....I'd guess you don't...so just keep lookin.

answered Mar 22 '11 at 12:26
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Andy Swan
1,656 points

4

What is the non-compete- is it for a narrow term and scope (say 1 year, competing in the same business)? If he won't sign that personally, I'd run away- more because of his shady rationale for wanting only the LLC to sign it though. That's a dodgy rationale.

answered Mar 21 '11 at 04:20
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User6492
1,747 points
  • Not necessarilty dodgy - the purpose of a company is to protect the shareholders from liability. Anytime you sign a contract personally, you forgo such protection. It is probably a prudent measure on his behalf but not conducive to a startup's higher risk. – Dave 8 years ago
  • I see where you're coming from but it's a single-member LLC- that's not the same situation as a regular corporation signing an NDA, in my mind, and add that to the insurance excuse, and it seems shady to me. – User6492 8 years ago

1

I am sure that there are wonderful and legitimate reasons for him to want to only sign through his LLC. And I am sure that there are wonderful and legitimate reasons for you to want him to sign as an individual. I am not a lawyer nor do I play one on television, so I can't speak to those.

I do know that in many locations and industry a non-compete is very very difficult to enforce. You can't deprive someone of their livelihood for example. I also know that, like NDA's, the agreement is only as good as your ability to defend and protect it. Ability usually means money.

If you are doing well and have earned the money to defend a non-compete-- he, as your partner is probably earning a good return and doesn't desire to leave. If on the other hand he wants to leave because he thinks he can do better alone -- well that is probably because you aren't doing well, and wont have the money to defend the non-compete anyway.

My business partner's phone number shows up in my auto-generated favorites (based on call volume) more than my significant other. While she doesn't like this much it is an accurate reflection of the level of contact and communication that happens between business partners.

You are about to get in bed with this guy. Do you trust him? As important in the development of a new business partnership as the financials, the business plan, the market analysis, the value proposition, the pie-in-the-sky numbers is the team. Do they know each other and work well together?

I would see this disagreement about the signing of a non-compete as a yellow flag that the "team" needs some work before it takes to the field.

answered Mar 21 '11 at 11:46
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Joseph Barisonzi
12,141 points

0

If you're worried about him sharing your IP at his next company, then an NDA should prevent that. If you're worried about him trying to use your IP as the basis for creating another startup, an intellectual property agreement should prevent that. I don't see non-competes as being that useful in most normal scenarios, other than being a scare tactic of employers.

answered Mar 23 '11 at 04:09
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James
71 points

0

I have an LLC of my own, and I could go either way on this sort of thing. I think that I'd be likely to want the LLC to enter in the agreement if I thought there was a likelihood of conflict otherwise.

Alternatively, he may just not trust you, and wants the protection of one step of separation provided by the LLC.

answered Mar 21 '11 at 11:30
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Mark Bessey
101 points

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