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When Should I Use A Non-Solicitation Clause?



When should I use a non solicitation clause?

If you’re building a business that depends on intellectual property or the power of community to scale then knowing when and how to implement a non-solicitation clause in your contracts will help you scale. These contract clauses will help protect what you’re building by ensuring that your competitors (or customers, for that matter) do not poach your top talent and that they do not drain the time and effort you put into building a strong community by siphoning off your best talent. Let’s start by having a look at what it is.

What is a Non-Solicitation Clause?

A non-solicitation clause in a sales contract is a provision that restricts one party from actively seeking to attract or do business with customers, clients, or employees of the other party involved in the contract. It aims to protect the business interests of the party that originally established the customer or employee relationships.

For example, in a sales contract between a software company and an enterprise company that’s buying their product, the software company might include a non-solicitation clause preventing the enterprise customer from directly approaching the software companies employees to build their own product internally. Similarly, in an employment contract, a non-solicitation clause might prohibit an employee from recruiting colleagues to leave the company and join a competitor.

These clauses are designed to safeguard relationships and prevent unfair competition, ensuring that both parties can benefit from the agreement without fear of exploitation or loss of business.

When Should A Software Company Use A Non-Solicitation Clause In Their Contracts?

A software company might find it most beneficial to include a non-solicitation clause in a sales contract in several situations:

1. Partnering with Resellers or Distributors:

  • If the software company works with resellers or distributors to sell its products, it may include a non-solicitation clause to prevent those partners from directly targeting the software company’s customers or potential customers. This protects the software company’s customer base and ensures that the resellers or distributors focus on selling the company’s products rather than competing with it for customers.

2. Engaging with Strategic Partners:

  • In cases where the software company collaborates with other companies on joint projects or ventures, a non-solicitation clause can prevent those partners from poaching the software company’s employees, customers, or intellectual property. This helps maintain the integrity of the partnership and protects the software company’s interests.

3. Employment Contracts for Sales Personnel:

  • When hiring sales representatives or other employees who have direct contact with customers, a software company may include a non-solicitation clause in their employment contracts. This prevents those employees from soliciting the company’s customers or clients for competing products or services if they leave the company. It helps safeguard the company’s customer relationships and prevents unfair competition.

4. Client Contracts for Custom Solutions:

  • If the software company provides customized solutions or services to clients, it may include a non-solicitation clause in the contract to prevent the client from hiring away key employees involved in delivering those services. This ensures continuity of service and protects the company’s investment in training and expertise.

Overall, including a non-solicitation clause in sales contracts can help protect a software company’s customer base, intellectual property, and key personnel, ultimately supporting its long-term growth and success.

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Non-Solicitation Clauses When You’re Strategy Is Based On Community

For a software company whose business strategy relies on building a community of users and contractors, such as Uber or Glovo, having a non-solicitation clause in their sales contracts can still be important in certain circumstances. Here’s why:

1. Protecting Contractor Relationships:

  • Both Uber and Glovo heavily rely on independent contractors (drivers, delivery partners) to provide their services. These contractors are crucial to the success of their platforms. Including a non-solicitation clause in their contracts with these contractors can prevent competitors or other third parties from directly poaching them. For example, if a competitor were to try to recruit Uber drivers or Glovo delivery partners en masse, it could disrupt the availability and reliability of their services, ultimately harming their business.

2. Preserving User Base:

  • While the primary focus of companies like Uber and Glovo is on their community of contractors, they also have a significant user base of customers who rely on their services. Including a non-solicitation clause in contracts with these users can prevent competitors from actively soliciting them to switch platforms. This helps maintain user loyalty and retention, which is critical in highly competitive markets.

3. Safeguarding Intellectual Property and Trade Secrets:

  • Even in a community-based business model, software companies like Uber and Glovo still have proprietary technology, algorithms, and trade secrets that give them a competitive edge. Non-solicitation clauses can help protect these assets by preventing contractors or users who have access to this information from being recruited by competitors who seek to gain insights or replicate their business model.

4. Maintaining Stability and Trust in the Community:

  • By including non-solicitation clauses in their contracts, Uber and Glovo can provide a sense of stability and trust within their communities. Contractors and users may feel more confident and secure in their relationship with the platform knowing that their interests are being protected from external solicitations.

While software companies like Uber and Glovo heavily rely on building communities of users and contractors, including non-solicitation clauses in their sales contracts can still be crucial for protecting their relationships, intellectual property, and overall business stability in a competitive landscape.

Example Non-Solicitation Clause

Below is an example of a non-solicitation clause that a tech company might include in its contracts:

“During the term of this agreement and for a period of [X] months/years following its termination or expiration, [Company Name] and its affiliates agree not to directly or indirectly solicit, induce, or attempt to solicit or induce, any employee, independent contractor, customer, client, or vendor of the other party, whether for employment, engagement, services, or business relationship, without the prior written consent of the other party. This restriction shall apply to all individuals or entities with whom the other party has had a business relationship during the term of this agreement.

Furthermore, [Company Name] and its affiliates agree not to disclose any confidential information obtained from the other party, including but not limited to customer lists, trade secrets, proprietary technology, or strategic plans, for the purpose of soliciting or engaging in business with any party outside the scope of this agreement.

Any violation of this non-solicitation clause shall be considered a material breach of this agreement and may result in legal action and remedies, including injunctive relief and damages.”

It’s important to note that the specific duration of the non-solicitation period and other terms may vary depending on the nature of the business relationship and the preferences of the parties involved. Additionally, it’s advisable to consult with legal counsel to ensure that the clause is tailored to the company’s specific needs and complies with applicable laws and regulations.

When Should You Use This Clause

A non-solicitation clause with a customer or an employee should typically be used when a company wants to protect its business interests, relationships, and confidential information from being exploited by competitors or third parties. Here are scenarios where it would be appropriate to include such a clause:

1. Customer Relationships:

  • B2B Sales Contracts: If your company operates in a business-to-business (B2B) environment where maintaining customer relationships is critical, including a non-solicitation clause can prevent your clients from being poached by competitors. This is especially important if your company invests significant resources in acquiring and retaining customers.
  • Service Contracts: When providing ongoing services or support to customers, including a non-solicitation clause can safeguard against competitors attempting to directly solicit your clients during or after the contract term.

2. Employee Relationships:

  • Employment Contracts: In employment agreements, particularly for key personnel or those with access to sensitive information, a non-solicitation clause can prevent employees from soliciting your company’s clients or other employees for a competing business upon termination of employment.
  • Independent Contractor Agreements: If your company engages independent contractors who have access to your clients or proprietary information, including a non-solicitation clause can help protect your client base and trade secrets.

3. Strategic Partnerships:

  • Vendor or Supplier Agreements: When working with vendors or suppliers who have visibility into your customer base or operations, a non-solicitation clause can prevent them from directly soliciting your customers or employees for their own business interests.
  • Joint Ventures or Collaborations: If your company collaborates with other entities on joint projects or ventures, including a non-solicitation clause can ensure that each party respects the business relationships established by the other party and does not attempt to poach customers or employees.

In all these situations, a well-crafted non-solicitation clause helps protect your company’s investments in customer acquisition, employee training, and proprietary information, while also fostering trust and stability in your business relationships. It’s important to draft these clauses carefully, considering the specific needs and circumstances of your company, and seek legal advice to ensure enforceability and compliance with relevant laws.

Knowing when you should use a non-solicitation clause will help you with the overall strategy of growing your startup. Startups are inherently businesses whose only real assets are it’s intellectual property and the talent that it can attract. Protecting your business as you scale includes both protecting your IP and your talent. A non-solicitation clause will help you protect the people that you’ve attracted along the way.

Contract Sent is not a law firm, this post and subsequent pages on this website do not constitute or contain legal advice. To understand whether or not the ideas and guidance on the Contract Sent website is applicable to your business, you should consult with a licensed attorney. The use and accessing of any resources contained within the Contract Sent site do not create an attorney-client relationship between the user and Contract Sent.

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