Non-compete clauses in start-up contracts: How founders and employees are meaningfully bound

Start-ups and young technology companies often depend on special business ideas, expertise and customer relationships. The interest in protecting this company know-how from emigration is correspondingly high. Non-compete agreements – i.e. agreements that prohibit founders or employees from competing with the company – are a common means of securing know-how and market position. During the ongoing contractual relationship, such a non-competition clause arises from the statutory duty of loyalty. After the end of the contract, on the other hand, there is generally freedom of competition: without a special agreement, a former employee or shareholder may immediately set up a competitor company or hire a competitor. In order to prevent this competition by insiders, post-contractual non-competition clauses can be agreed.

In Germany, however, such clauses are subject to strict statutory and case law requirements. The relevant legal bases are, in particular, Sections 74-75f HGB for employees (German Commercial Code, concerning post-contractual non-competition clauses for employees), Section 138 BGB (German Civil Code, immorality of excessively restrictive agreements) and Section 1 GWB (German Act against Restraints of Competition, prohibition of non-competition agreements that violate antitrust law). If the strict requirements are not met, non-competition clauses are either void – i.e. completely ineffective – or at least non-binding, so that the parties concerned are free to decide whether they wish to comply with them. As a result, such clauses should only be effective to the extent necessary to protect the legitimate interests of the company without unduly impeding the professional activities of the parties concerned.

The following article – from the perspective of a lawyer specializing in IT and contract law – shows how non-compete clauses in start-up contracts can be drafted in a legally compliant manner. The focus is on practical drafting tips for founders and employees in Germany. First, non-compete clauses for founders/shareholders are examined, followed by those for employees. Based on the law, case law and practical guidelines, the effectiveness requirements (e.g. written form, duration, geographical scope, compensation for waiting periods, interest in protection) are explained and it is shown how typical clauses must be formulated in order to be enforceable.

Non-competition clauses for founders and shareholders

Duty of loyalty and non-competition during membership of the company

Unlike employees, shareholders of a corporation (e.g. GmbH) are not subject to a general statutory non-competition clause vis-à-vis “their” company. There is no explicit provision in the law for GmbHs in particular; nevertheless, a non-competition clause is derived from the duty of loyalty under company law for certain shareholders. This duty of loyalty arises from the corporate relationship itself and states that the shareholder may not impair the interests of “their” company through competing transactions of their own. During the period of membership of the company – i.e. as long as someone is a shareholder – the duty of loyalty can therefore prevent them from engaging in competitive activities.

However, this statutory non-competition clause for shareholders only applies under certain conditions. The decisive factor is whether the shareholder can exert a significant influence on the management and the company concept due to their position. Typically, these are majority shareholders or shareholder-managers who have access to business secrets and can steer the fortunes of the company. Such dominant shareholders would create a conflict of loyalty through their own competing companies, which is incompatible with their duty of loyalty. In the case of small minority shareholders without influence, on the other hand, it is disputed whether a non-competition obligation based on a duty of loyalty exists at all. In practice, a statutory non-competition clause will have to be denied in the case of pure capital investors without management authority. For general partners of a partnership such as an OHG or KG, on the other hand, a strict non-competition clause applies by law (Section 112 HGB), as they, as managing partners with unlimited liability, must enjoy the trust of their co-shareholders to a particular degree.

Conclusion: Founders should refrain from competing in the business area of their own company for the duration of their shareholding. In the case of significant shareholders, this follows from the law and the duty of loyalty. Nevertheless, it is advisable to create contractual clarity. A clause is often included in the articles of association of the GmbH that prohibits all shareholders from engaging in certain competitive activities during their membership. This means that minority shareholders are also contractually subject to a non-competition clause, even if the duty of loyalty does not apply by law.

Non-compete covenants in articles of association – scope and limits

Many startup founders already agree a non-competition clause in the articles of association or in a separate shareholder agreement. Typical content: As long as the founder is a shareholder in the company and for a certain period after leaving, he may not set up his own competitor company or work for a competitor company. Such contractual clauses do not require any special form and can be negotiated individually. However, their effectiveness is limited by civil and antitrust law, in particular Section 138 BGB and Section 1 GWB.

Non-compete clauses in articles of association must be appropriately limited – in terms of time, territory and subject matter. They must not go beyond what is really necessary to protect the company. The Federal Court of Justice and the higher courts apply a strict standard here. Interests must be weighed up in each individual case: The interest of the (co-)shareholder in freedom of professional activity must be weighed against the interest of the company in protection against disloyal competition.

Industry protection clauses that are too sweeping and immoral (Section 138 BGB) are, for example, inadmissible if they prohibit the shareholder from working in the company’s entire industry.. Such a comprehensive prohibition of activity would in fact be tantamount to a professional ban and is therefore invalid Example: A clause that prohibits a departing shareholder from carrying out any activities in any company that is or could be similar to any business purpose of the start-up GmbH clearly goes too far. The Munich Higher Regional Court rejected such an extensive non-competition agreement (which even covered potential future competitors and widely affiliated companies), including the contractual penalty, as null and void. Even a possibility provided for in the agreement to exempt the shareholder from the prohibition by shareholder resolution in individual cases could not save the excessive clause. This is because the affected party had no right to exemption, but was bound by the prohibition until a court clarification – an unacceptable situation.

In contrast, narrowly defined prohibitions that are limited to the company’s interests worthy of protection are permissible. A frequently cited example is the prohibition on customer protection: for example, the departing shareholder may be prohibited from poaching or acquiring certain customers from the previous years for two years after leaving the company. The prohibition on exploiting the company’s trade and business secrets after leaving the company is of course also permissible – even without an express provision, there is a continuing obligation to protect secrets.

Time limits: The prevailing view is that a maximum duration of two years is appropriate for post-contractual non-competition covenants of shareholders. Anything longer than this generally exceeds what is “necessary” and is considered disproportionate. In this respect, the BGH speaks of a standard limit of two years. Only in special exceptional cases – for example, if a shareholder receives a very high consideration upon leaving the company or other significant interests are involved – can a longer ban be justified. If a longer period is nevertheless stipulated in the agreement (e.g. five years), there is a risk that the clause as a whole will be null and void. Practical tip: In order to at least save the permissible period, a severability clause is recommended, which automatically shortens an excessively long period to the legally permissible level in case of doubt. For example, the Federal Court of Justice has ruled that in the case of an excessively long customer protection clause, the entire prohibition does not lapse, but the period is to be limited to a maximum of two years. Nevertheless, the time extension should be kept moderate from the outset.

Geographical and material limitation: The geographical scope and material scope must also be clearly and as narrowly defined as possible. The clause should only refer to markets and business areas in which the company is actually active or at least has concrete plans. It is advisable to refer to the object of the company as defined in the articles of association and, if necessary, to exclude certain regions in which the startup does not operate. Global non-compete c lauses without territorial restrictions are regularly problematic if the company does not operate worldwide. In this case, there is a risk of a violation of the constitutionally protected freedom of occupation (Art. 12 GG) and Section 138 BGB. Courts require that the departing founder can clearly inferfrom the clause which activities are specifically prohibited. Unclear or overly general prohibitions are invalid in case of doubt.

Antitrust control (Section 1 GWB): Another touchstone is antitrust law. Non-competition clauses in company agreements may not merely have the purpose of preventing unwelcome competition without this being necessary for the functioning of the cooperation. According to Section 1 GWB, agreements between companies that have the purpose or effect of restricting competition are not permitted. It is true that a non-competition clause between shareholders is based on their joint articles of association and is therefore part of the cooperation (so-called ancillary agreement). Nevertheless, the Düsseldorf Higher Regional Court has emphasized that post-contractual non-competition covenants are only permitted from an antitrust perspective if they are necessary to protect against disloyal exploitation of the joint work. Accordingly, there is no legitimate interest in prohibiting an ex-shareholder from engaging in any competitive activity. A protective clause is only permissible **if it is intended to prevent, under reasonable conditions, the departing shareholder from poaching customers to whom he only had access due to his position as a shareholder, or from using internal information that only became known to him as a shareholder. In short, the prohibition must be tailored to the prevention of disloyal competition, not to a general lock-out of a new competitor. Otherwise, a non-competition clause in a company agreement may violate Section 1 ARC and thus be void as immoral pursuant to Section 138 BGB. Especially in the case of small minority shareholders without significant influence, a comprehensive non-competition clause is viewed critically under antitrust law. In such cases, it apparently only serves to “spare” competition, which is not a sufficient justification.

Conclusion for founder clauses: Non-compete clauses in articles of association are an important instrument for binding founders to the startup and protecting know-how. However, they should be formulated with a sense of proportion. In practice, it is advisable to formulate such prohibitions narrowly – limited in terms of subject matter and territory to the business field and core area of the company. After a shareholder leaves the company, a non-competition clause should not apply for longer than two years. Longer periods are only justifiable in exceptional cases and then in return for appropriate compensation. The clause must make it clear which activities are prohibited. Unclear or disproportionate prohibitions risk nullity as a whole. Finally, it should be noted that if such clauses are used as standard (e.g. in model articles of association), a general terms and conditions review pursuant to Sections 305 et seq. BGB can take place. Any unreasonable disadvantage to the contractual partners would lead to invalidity. Overall, the following applies: Only necessary restrictions are permitted – the company’s legitimate interest in protection (such as customer loyalty or protection of secrets) must always be weighed against the founder’s professional freedom of action.

Post-contractual non-compete clauses for managing director contracts

It is not uncommon for startup founders to also act as managing directors of the GmbH. Even without being a shareholder, a managing director of a GmbH is subject to a comprehensive non-competition clause during his term of office by virtue of his duty as an executive body – he may not engage in any activity that impairs the interests of “his” GmbHk1.de. However, the following also applies after the dismissal or termination of the managing director’s employment contract: a post-contractual non-competition clause requires an express agreement. Statutory provisions such as §§ 74 HGB do not apply directly to external managing directors, as they are not employees in the sense of employment law. The effectiveness of such a prohibition is therefore essentially determined by § 138 BGB (immorality) and the principles of case law outlined above. After the departure of a managing director, a non-competition clause beyond two years is generally inadmissible unless appropriate compensation is paid In practice, managing director service agreements often contain clauses that are based on the rules of Section 74 HGB in order to create legal certainty. Particularly in the case of third-party managing directors (without company shares), compensation is often agreed even though there is no legal obligation to compensate employees – this is to prevent a possible classification as an immoral prohibition of employment. The roles overlap in the case of managing partners: Here, both the employee-like position and the shareholder position may require examination. In such cases, the courts also apply the two-year limit and demand compensationfor longer prohibitions. Overall, non-competition clauses in managing director agreements should be formulated with similar caution as for founders – limited to what is necessary and, if possible, based on the established labor law requirements.

Post-contractual non-competition clauses for employees (employment contract)

For salaried employees – from software developers to sales managers – the special rules of the §§ 74 ff. HGB . These long-established regulations ensure that a post-contractual non-competition clause is only binding under strict conditions. The background to this is that such a prohibition represents a considerable encroachment on the employee’s professional freedom of movement. If you want to keep competition away from your former employer, you have to make certain promises to the employee in return (in particular compensation) so that the ban is balanced and fair.

Legal requirements for effectiveness (Sections 74 et seq. HGB)

According to Section 74 HGB, a post-contractual non-competition clause is only binding on an employee if the following conditions are cumulatively met:

• Written agreement: The non-competition clause must be set out in writing and signed by both parties. The clause must be included in the employment contract itself or in a separate agreement. If the written form is missing, the prohibition is null and void. (Note: Employer and employee usually each receive an original – the written form of § 126 BGB is required).

• Delivery: Although not expressly regulated in Section 74 HGB, it is recognized: The employer must provide the employee with a copy of the non-competition agreement at the latest at the end of the contract. Otherwise, he cannot invoke it later (cf. sec. 74b para. 2 HGB old version, nowadays continuing in case law).

• Maximum period of 2 years: The duration of the post-contractual commitment may not exceed two years. Longer waiting periods are not permitted by law. If a longer period is nevertheless agreed, the prohibition is non-binding in this respect – the employee can therefore compete freely again after two years, even if the contract stipulates otherwise. In practice, contractual clauses are therefore limited to 12 or 24 months.

• Legitimate business interest of the employer: The non-competition clause must be objectively justified by a legitimate interest of the company. Typical protective interests are, for example, the protection of trade secrets, know-how, customer relationships or specific company knowledge that the employee has acquired in the course of their employment. There is no legitimate interest if the prohibition only serves to suppress annoying competition without the employee having worked in sensitive areas. Ideally, a non-competition clause should therefore specify which interests it is intended to protect (e.g. “to protect the employer’s confidential customer and product information”). If an interest worthy of protection is completely absent, the prohibition is non-binding.

• No unreasonable impediment to professional advancement: The ban must not unreasonably impede the employee’s professional development. This means that the ban must be reasonable from a geographical, technical and sectoral perspective so that the employee still has a reasonable opportunity to pursue their career despite the ban. A complete change of sector or relocation should not be the only remaining option for the employee. Excessively broad prohibitions (e.g. “worldwide in any activity in the IT industry”) do not satisfy this criterion and would not be binding. The clause should therefore specify the specific field of competition, for example limited to certain products, customer groups or regions in which the former employee may not work. What is considered appropriate depends on the individual case (position of the employee, market, specialization, etc.).

• Compensation for absence: The decisive factor is the financial consideration: the employer must undertake to pay the employee compensation of at least 50% of the contractual benefits last received for the duration of the prohibition. This obligation to pay compensation is mandatory under Section 74 (2) HGB. The last total earnings package received is taken into account: the calculation includes the last basic salary paid plus variable remuneration, bonuses, pro rata vacation and Christmas bonuses, commissions, benefits in kind, etc. Example: If the employee most recently earned an annual salary of €80,000 plus a bonus and a company car for private use worth a further €20,000, the minimum annual compensation is €50,000 (i.e. 50% of €100,000), i.e. approx. €4,167 per month during the waiting period. – The agreement of a higher waiting period compensation (e.g. 100%) is permissible; below the 50% limit, it is invalid. If no compensation is agreed in the contract, the non-competition clause is null and void (absolutely ineffective). If the compensation is agreed but is too low (<50 %), the non-competition clause is non-binding – more on this in a moment.

If all of these requirements are met, the non-competition clause is binding, i.e. the employee must comply with it post-contractually and is entitled to the agreed compensation in return. If even one of the conditions is missing, this has serious consequences: The ban is then legally unenforceable. However, as indicated, a distinction is made between two levels of ineffectiveness:

• Nullity: In the event of very significant deficiencies (in particular breach of form or no compensation), the prohibition is null and void and has no legal effect The employee may work without competition and there is also no entitlement to compensation, as the clause is treated as if it had never existed.

• Non-binding: If there is a clause that does not meet certain minimum requirements in terms of content (e.g. compensation is too low, duration is too long, lack of interest), the prohibition is not invalid per se, but it is “non-binding” for the employee. This means that the employee has a right to choose. At the beginning of the waiting period, they can decide whether they wish to comply with the ban and claim compensation for this, or whether they wish to waive the ban and therefore not receive any compensation. This right of choice must be exercised immediately, i.e. practically immediately after the end of the employment relationship. If the employee does not expressly exercise his right of choice, it can be assumed that he implicitly chooses to leave by taking up a competing activity.

The following cases in particular are not legally binding (see Section 74 (2) HGB and Section 74a HGB):

• the waiting allowance is less than 50 % of the last salary,

• the duration of the ban exceeds 2 years,

• the employer has no legitimate business interest in the prohibition,

• the ban would mean an unreasonable impediment to professional advancement (e.g. too broad a field of activity,

• the prohibition is structured as a conditional non-competition clause (e.g. only applies if the employer arbitrarily insists on it).

In these constellations, the employee can therefore choose whether or not to observe the non-competition clause. If he complies, he can demand the contractual (but at least the statutory minimum) compensation from the employer. If he ignores the prohibition, he will not receive any compensation, as the purpose of the prohibition no longer applies. In this case, the employer cannot derive anything from the non-binding contract against the employee.

Example: A one-year non-competition clause is agreed in the employment contract, but the employer only promises 30% of the last salary as compensation for non-competition. This is below the statutory minimum. The developer resigns and founds his own start-up in the same sector. He is now free to decide: Either he complies with the ban, puts his work on hold for a year and claims 50% of his last salary (the minimum compensation owed by law). Or he considers the ban to be non-binding for him – in which case he can operate his startup immediately, but forgoes the 30% compensation. Since 30% of the salary hardly compensates for the loss of earnings, he will probably decide to compete. – Result: The clause fails to achieve its purpose; the employer cannot prevent him from competing due to a lack of binding force.

Note: The employer has the option of proactively eliminating a non-binding prohibition before the employee exercises their right to choose. If, for example, the employer realizes that the clause is non-binding due to insufficient compensation, it can waive the non-competition clause in writing in accordance with Section 75a HGB before the employment relationship ends in order to eliminate the uncertainty. The prohibition then no longer applies and the employee may compete – however, the employer must still pay half of the remuneration for up to one year (see below).

Typical contents of a non-competition clause in an employment contract

A well-drafted post-contractual non-compete clause in the employment contract includes the following core elements:

• Scope of the prohibition: The activities covered by the prohibition are described precisely. This is usually based on the employer’s specific business area, e.g. “the employee may not work for a company that competes with XYZ GmbH in the field of payment software development”. Specific customers or projects can also be included. The more concretely the area of activity is outlined, the more likely the prohibition is to be deemed appropriate.

• Geographical scope: The ban should specify the geographical area in which it applies – for example, “within Germany” or “in the market of the DACH region”. A global ban is only justified if the company operates worldwide. Otherwise, the clause should be limited to relevant countries or regions so as not to have a disproportionate effect.

• Duration (waiting period): Usually 6 to 24 months. The maximum duration is 24 months from the end of the employment relationship. It is advisable to specify the end date or the exact number of months, e.g. “for a period of one year after leaving”. As mentioned, an overlong period would automatically be limited to 2 years; however, you should not go beyond this.

• Compensation for waiting time: The clause must specify the amount of compensation, at least “50% of the last contractual remuneration received”. This exact wording is often taken from the law. All remuneration components should be included. Employers often agree exactly 50 % for reasons of equal treatment, although 60 % or more would also be possible. The compensation must be paid for each month of the waiting period (usually monthly in arrears). The clause can also stipulate that the employee will be paid an appropriate advance payment on request (Section 74b HGB).

• Crediting of other earnings: By law, the employee may work elsewhere during parental leave, but must take into account what he earns there, provided that the compensation + new salary > amounts to 110% of his previous income. In other words, the employee should receive a maximum of 110% of their previous salary; any earnings above this amount will be deducted from the compensation for parental leave. A good contractual clause mentions this “110% rule” and obliges the employee to inform the former employer of their new incomecompany.com. This enables the employer to avoid excessive payments. Example: If the ex-employee earns 80 % of their old salary in their new job, they will continue to receive the full 50 % waiting allowance from their old employer despite their new earnings (because 80 % + 50 % = 130 % > 110 % – a deduction of 20 % can therefore be made up to the 110 % threshold, so that ultimately 30 % would be paid by the old employer). If, on the other hand, he already earns 120% of his previous salary, the old employer does not have to pay anything as the threshold has been exceeded.

• Contractual penalty (optional): To ensure compliance, some employers include a contractual penalty in the clause in the event of non-compliance. For example, it can be agreed that the employee pays a lump sum penalty (such as one month’s salary) for each case of culpable breach. However, caution is advised: A contractual penalty that is too high or indefinite may itself be ineffective or make the prohibition appear disproportionate when viewed as a whole. In addition, it does not replace statutory damages: irrespective of a penalty, the employer can demand compensation for damages in the event of a breach, for example to reclaim any profits the employee has made from the competing activity (Section 61 HGB). Many non-competition covenants also work without a contractual penalty, as the employee is aware that they risk at least their compensation in the event of a breach and must expect to be sued for injunctive relief.

In addition, it can be noted in the contract that §§ 74 ff. HGB apply in addition to leave no room for doubt. Termination constellations are also often mentioned (see below), e.g. a note that the prohibition does not apply in the event of termination by the employer. Overall, the wording should be transparent, unambiguous and complete – as is also required by the legal control of general terms and conditions if it is a standardized employment contract.

Legal consequences upon termination of the employment relationship

Whether an agreed non-compete agreement actually applies depends crucially on how the employment relationship is terminated. The German Commercial Code (HGB) contains differentiated provisions on this in order to ensure fairness (Section 75 HGB):

• Employee gives notice: If the employment relationship ends due to termination by the employee, the post-contractual non-competition clause comes into force as agreed. The employee must then comply with the non-competition clause and receives the compensation in return.

• Employee resigns without notice for good cause (Section 626 BGB) due to employer’s fault: If the employee terminates the contract for reasons for which the employer is responsible (e.g. due to non-payment of salary or gross breach of contract), it would be unfair to tie the employee to the competition anyway. Therefore, § 75 para. 1 HGB provides: In this case, the non-competition clause becomes ineffective if the employee declares in writing within one month of the termination that he does not consider himself bound by it. With this declaration (a unilateral declaration of termination), the prohibition ceases to apply completely. If the employee fails to make the declaration, the prohibition remains in place in principle – he could therefore also decide to take the compensation despite termination for good cause; in practice, however, a waiver is almost always declared.

• Employer gives notice of termination (for operational or personal reasons): If the employer in turn gives proper notice of termination, the non-competition clause becomes invalid, Section 75 (2) HGB. This rule – surprising for many – is intended to prevent an employee from being disadvantaged twice: First he loses his job at the instigation of the company, then he would not even be allowed to work elsewhere in his profession. The ban therefore does not apply if the employer has given notice. Exception: If the employer terminates the employment contract for a significant reason relating to the employee (i.e. for conduct-related reasons, e.g. theft, serious breach of duty), the ban remains in place. This is because the employee has provoked the dismissal through his conduct; it appears justified to nevertheless bind him to the previously agreed non-competition clause – otherwise misconduct would even relieve him of the obligation.

• Employer terminates without notice for good cause (termination due to conduct): Here too, Section 75 (3) HGB provides that the non-competition clause may continue to apply. However, in this case, the employer’s obligation to pay the compensation for non-competition does not apply. Background: If the employee leaves the company due to extraordinary dismissal for their own misconduct (e.g. breach of trust, competition during the employment relationship, etc.), they should not be “rewarded” with compensation while at the same time being kept away from the competition. The law therefore allows the employer to enforce the ban without compensation in the event of justified termination without notice. In practice, this case is rare – employers usually prefer to waive the ban in order to avoid the risk of unnecessary legal disputes.

Waiver by the employer (Section 75a HGB): The employer can unilaterally waive the agreed non-competition clause at any time until the end of the employment relationship in order to release himself from the obligation. The waiver must be declared in writing. Such a waiver immediately releases the employee from the non-competition clause. However, the employer is still obliged to pay the non-compete compensation for 12 months (or for the remaining shorter duration of the non-compete clause if this was less than one year). In effect, the employer can therefore “buy his way out”. In many cases, it only becomes apparent after some time that the non-compete clause was not so important after all (for example, because the employee had no critical insight at all). In this case, the waiver is an option to save on future compensation payments – albeit with the aforementioned one-year after-effect: if the employer waives the non-compete clause at the time of termination, for example, it must still pay for a full year from the date of resignation, even if the employee immediately starts working for the competition. Practical tip: As the financial consequences are considerable, an employer should only agree a non-compete clause for key employees. An overly precautionary “standard” non-compete clause for every employee often leads to the employee having to leave later by way of a waiver and still being allowed to pay.

Enforcement and consequences of violation

If a former employee adheres to the effectively agreed non-competition clause, he or she will receive the monthly compensation for non-competition. However, if he violates this – e.g. by secretly working for a competitor after all or starting a competing project himself – this has several consequences:

• Loss of compensation: If the prohibition is violated, the employer is entitled to refuse or discontinue the compensation for non-competition. After all, this was the compensation for refraining from competing. Contracts often expressly stipulate that the right to compensation lapses if the employee breaches the prohibition. Even without an explicit clause, at least a serious breach would result in the employer no longer having to pay (possibly retroactively from the breach).

• Claims for damages: In addition, the employer can claim damages (Section 280 BGB in conjunction with the non-competition agreement). Section 61 of the German Commercial Code (HGB) stipulates that the employee must surrender to the employer any profit made through prohibited competition. Alternatively, the employer can demand that transactions made by the employee for his own account or for the account of a third party during the waiting period are deemed to have been made for the account of the former employer (Section 61 (1) HGB) This rule is primarily aimed at commercial employees, but applies accordingly: the employee should not be allowed to retain any advantages through disloyal competition. In practice, the damage is often difficult to quantify – hence the aforementioned approach of agreeing a contractual penalty if necessary in order to lump-sum the sanction. If a contractual penalty is provided for in the contract and is appropriate, the employer can claim it immediately without having to prove the actual damage. However, this does not replace further compensation if the damage is higher.

• Injunctive relief: Preventive legal protection is also important from the company’s point of view. If an ex-employee breaches the non-competition clause, the former employer can obtain a court injunction prohibiting the employee from continuing to work for the competitor. The prerequisite for this is the agreement of an effective prohibition and a current breach or imminent breach. Courts will uphold such injunctions if the clause is clear and binding, cannot be legally objected to and a breach is credibly established. Especially in sensitive areas (poaching key customers, use of insider knowledge), this is the sharpest sword: the employee must then cease their competing activities immediately or face contempt of court. Start-ups should therefore not hesitate to take this legal route in an emergency in order to protect their trade secrets.

Alternatives and additions to employee retention

As shown, post-contractual non-compete clauses are associated with financial costs and legal hurdles. In practice, employers therefore carefully examine for whom such a clause is worthwhile. There are often alternatives for retaining employees with know-how without immediately agreeing a non-compete clause subject to compensation:

• Post-contractual non-solicitation clause: A milder measure is the prohibition of soliciting customers or employees after leaving the company. Such non-solicitation clauses prohibit actively approaching former customers of the employer or motivating colleagues to change jobs for 1-2 years, for example. These clauses interfere less with the freedom to choose an occupation, as the employee is allowed to compete, but only refrains from certain non-solicitation activities. According to the prevailing opinion, pure non-solicitation clauses do not fall under Section 74 HGB – they are therefore effective even without compensation, provided they are reasonably limited in time and objectively justified. Their advantage is that the employee can certainly go to a competitor or open their own business, but may not, for example, deliberately “empty out” the previous employer. Non-solicitation clauses are particularly useful for protecting established teams or the customer base. It should be noted that a non-solicitation clause that is too broad (e.g. any former customers, without a time limit) could in turn be considered immoral. Used correctly, however, such clauses offer a good compromise between protection and flexibility.

• Extended notice periods / retention clauses: Alternatively, you can try to keep know-how carriers in the company for longer by extending notice periods or agreeing repayment clauses for further training etc.. This makes a sudden change more difficult and gives the company time to react to an announced departure. Such measures have a preventative effect, but are no substitute for a non-compete clause for the period after leaving.

• Retention measures: Finally, it should be mentioned that motivating people to stay is often more effective than banning them from leaving. Shareholdings, virtual shares, retention bonuses or attractive career prospects can bind top performers to the startup without having to resort to legal restrictions. Although these belong more in personnel management than in contract law, they are a common means of preventing a loss of expertise, especially in start-ups.

In summary, a post-contractual non-compete clause for employees should always be carefully considered: It is a “financial drag” on the employer and only makes sense if the employee has sensitive knowledge or customer contacts whose loss justifies the compensation investment. Otherwise, it is often better to use alternative means. However, if you decide on a non-competition clause, you must adhere to it consistently – including payment of compensation for non-competition – and should be prepared to enforce it in court if necessary.

Design tips and conclusion

Non-compete clauses can help start-ups to protect their business model and expertise – but only if they are legally compliant and moderate. Ineffective clauses offer no protection and can be worthless in an emergency. The most important drafting tips can be summarized as follows:

• Clarity before breadth: Formulate the prohibition as precisely as possible with regard to industry, activity and area. Avoid blanket formulations which, in case of doubt, would affect the entire professional field of activity. What exactly is considered competition? The more precisely this is stated in the contract, the better – the tied founder or employee must be able to recognize what is permitted and what is prohibited.

• Appropriate scope: Limit the prohibition to what is necessary. Ask yourself: What exactly should the company be protected from? Is it certain customers, technologies, regions? This should form the basis of the clause. Anything that goes beyond this – e.g. a general ban on all competition – is open to legal challenge. In particular, prohibitions in company agreements should be based on the specific object of the company so that they are legally valid under antitrust law.

• Maximum duration of 2 years: Do not exceed the two-year limit for post-contractual prohibitions – neither for founders nor for employees. Longer bans run the risk of being ineffective overall or being reduced to 2 years by the court. If there is a particular interest in a longer commitment (e.g. in the case of know-how carriers who have received an extraordinary severance payment), it is essential to agree a waiting period compensation that exceeds the 50% basis in order to safeguard the clause

• Appropriate compensation for employees: The following applies here without exception: promise at least 50% of the last total earnings. There is no harm in being a little more generous (e.g. 60%), which is also more attractive for the employee – but less than 50% is not a valid agreement. If in doubt, the basis for calculating all salary components should be listed in the contract (basic salary, bonuses, supplements, etc.). In addition, a deduction rule for new income should be included, ideally with reference to the 110% limit under Section 74c HGB.

• Contractual safeguards: Use severability clauses where appropriate to avoid excesses. Example: “If the agreed duration of X months exceeds the maximum permitted waiting period, the maximum permitted duration is automatically deemed to have been agreed.”.This prevents the clause from lapsing completely due to minor overruns. – In the case of standard employment contracts or pre-formulated partnership agreements, make sure that the non-competition clause stands up to a general terms and conditions test: no surprising side agreements, no one-sided advantages only for the company For example, a clause that allows the employer to waive the prohibition at will without nevertheless paying compensation to the employee would be non-transparent and ineffective.

• Emphasize the protection of legitimate interests: In the articles of association in particular, it can be useful to state the protective purpose in the clause itself. For example: “…to protect the company from the disloyal use of know-how acquired in the corporate relationship.”This emphasizes that the prohibition is not an end in itself, but serves a legitimate purpose. It also does no harm to briefly indicate in the employment contract why the clause is agreed (e.g. protection of secrets). In the event of a dispute, this can have a positive influence on the interpretation.

• Prepare enforceability: Consider in advance how you would enforce the ban in an emergency. Does a contractual penalty make sense as a deterrent? Do you want to explicitly mention injunctive relief? Although legal claims also exist in this form, a clear threat in the contract increases compliance among employees. Please note, however, that a disproportionately high contractual penalty could again contribute to the invalidity of the clause – a sense of proportion applies here.

• Provisions for special cases: It is best to indicate in the employment contract what applies in the event of certain terminations. Although Section 75 of the German Commercial Code (HGB) regulates this by itself, transparency helps: For example, you can include the following: “The non-competition clause does not apply if the company terminates the employment relationship without good cause; in this case, the obligation to pay compensation also lapses.” This way, the employee knows what is going on and there is less potential for disputes about the effectiveness of the termination.

In conclusion, it should be noted: Non-compete clauses are double-edged. They not only bind the tied employee, but also the company – especially financially. A startup should therefore use them in a targeted manner, especially for people who could really cause considerable damage if they went directly to the competition. Non-compete clauses are practically indispensable for founders and major shareholders, but are often easier to justify because founders typically have considerable influence and insider knowledge. For normal employees, on the other hand, it should be carefully weighed up whether the cost-benefit ratio is right. If so, the clauses must be drafted in a technically sound manner so that they are legally sound and enforceable in an emergency. A well-drafted non-competition clause that complies with legal requirements ensures that a startup does not experience any nasty surprises in competition due to migration – and that both legal claims for injunctive relief and contractual compensation are reliably effective in the event of a conflict. In this way, founders and employees are “sensibly bound” without exceeding the legal leeway.