Can Non-Solicitation Clauses Stop Startup Co-Founders?
Introduction
When a technology startup begins to experience conflict among its co-founders, the dispute may quickly extend beyond ownership and management issues. A departing founder may attempt to recruit the startup’s lead developers, transfer major clients, or use confidential business information to establish or join a competing venture.
A carefully drafted non-solicitation clause may help prevent these acts. Philippine courts generally recognize contractual restrictions that protect legitimate business interests, but the restriction must be reasonable, clearly written, and consistent with law, public policy, and the circumstances of the parties.
What Is a Non-Solicitation Clause?
A non-solicitation clause is a contractual undertaking that restricts a person from actively seeking to transfer or appropriate specified business relationships. In a startup setting, it may prohibit a departing co-founder from recruiting developers, soliciting clients, inducing employees to resign, or diverting business opportunities belonging to the company.
A non-solicitation clause is different from a non-compete clause. A non-compete clause restricts work for or participation in a competing business, while a non-solicitation clause focuses on particular conduct, such as recruiting identified employees or approaching existing clients.
The distinction matters because a non-solicitation clause may impose a narrower restraint than a blanket prohibition against working in the technology industry or joining another startup.
Are Non-Solicitation Clauses Enforceable in the Philippines?
Yes, provided that the clause is reasonable and properly drafted. Philippine jurisprudence recognizes that parties may agree to contractual restrictions when these are not contrary to law, morals, good customs, public order, or public policy.
In Tiu v. Platinum Plans Phil., Inc., G.R. No. 163512, December 19, 2007, the Supreme Court upheld a non-involvement clause after finding that it was not greater than necessary to provide fair and reasonable protection to the employer. The Court considered the employee’s access to confidential and sensitive business information and the competitive nature of the business. [Tiu v. Platinum Plans Phil., Inc. (2007)](#J4.7)
Similarly, in Century Properties, Inc. v. Babiano, et al., G.R. No. 220978, April 20, 2016, the Court enforced a clear contractual restriction involving competition, confidentiality, and forfeiture of commissions. The Court recognized the employer’s interest in protecting trade secrets and sensitive business information, particularly where the employee held a managerial position. [Century Properties, Inc. v. Babiano, et al. (2016)](#J1.11)
These decisions do not mean that every restriction will be enforced. Courts examine the language of the agreement, the parties’ relationship, the protected interest, and the scope and duration of the restraint.
What Makes a Non-Solicitation Clause Reasonable?
A non-solicitation clause should be limited to what is reasonably necessary to protect the startup’s legitimate interests. The following features generally strengthen enforceability:
- Clear prohibited conduct: The clause should identify whether it prohibits direct solicitation, indirect solicitation, recruitment, inducement, referral, or participation through another person.
- Defined protected persons: The agreement should identify the categories of employees, contractors, developers, customers, or clients covered by the restriction.
- Reasonable duration: The restriction should apply only for a period justified by the company’s business needs.
- Business-related purpose: The clause should protect legitimate interests such as workforce stability, client relationships, trade secrets, and confidential product information.
- Proportionate scope: The restriction should not prevent the departing founder from engaging in an entire industry without a sufficient connection to the company’s protectable interests.
In Tiu, the Court emphasized that the restriction must be reasonable as to time, trade, and place and must not be greater than necessary to protect the employer. [Tiu v. Platinum Plans Phil., Inc. (2007)](#J4.7)
Can a Startup Protect Its Lead Developers?
Yes. A startup may have a legitimate interest in preventing the coordinated departure of its principal engineers, software developers, product managers, or other personnel whose skills and knowledge are central to the business.
The agreement should not merely state that the departing founder may not “hire anyone connected with the company.” It should specify the covered personnel and the prohibited acts. For example, it may prohibit the founder, during the agreed period, from:
- offering employment or consultancy work to covered developers;
- inducing them to resign or terminate their engagements with the startup;
- encouraging them to transfer confidential source code, product road maps, or technical documentation;
- organizing a competing team using the startup’s employees or contractors; and
- using another entity, recruiter, or intermediary to accomplish the prohibited solicitation.
The restriction should also account for circumstances in which the developer independently responds to a general job advertisement. A clause that treats every later employment relationship as a violation, even without solicitation, may be challenged as overbroad.
Can a Startup Protect Its Major Clients?
A startup may also protect established client relationships against active diversion or solicitation by a departing co-founder. The agreement should identify the clients or define them objectively, such as customers with whom the startup had a material business relationship during a specified period.
In Punongbayan, et al. v. Lepon, G.R. No. 174115, March 13, 2015, the Supreme Court recognized that an employer has a protectable interest in customer relationships developed or nurtured by an employee. The Court also stated that an employee acting as an agent owes duties of fidelity and loyalty and may not solicit the employer’s customers or co-employees for personal benefit or for a competitor. [Punongbayan, et al. v. Lepon (2015)](#J5.21)
For a startup, the clause may cover the company’s largest accounts, customers under active contracts, clients involved in pending negotiations, and customers with whom the departing founder had material dealings on behalf of the company.
However, the agreement should distinguish between legitimate solicitation and ordinary competition. A former founder may not necessarily be prohibited from accepting business from a client that independently approaches the founder, particularly where the contract does not expressly cover that situation.
What Should Co-Founders Include in the Agreement?
A startup’s founders’ agreement, shareholders’ agreement, employment agreement, or separation agreement may contain non-solicitation obligations. The clause should be coordinated with the company’s confidentiality, intellectual-property, equity, resignation, and dispute-resolution provisions.
At a minimum, the agreement should address:
| Provision | What It Should Address |
|---|---|
| Covered personnel | Employees, developers, contractors, consultants, and other specified personnel |
| Covered clients | Existing customers, clients under negotiation, and accounts handled by the founder |
| Prohibited conduct | Direct or indirect solicitation, recruitment, inducement, referral, or diversion |
| Duration | The period during which the restriction applies after departure |
| Exceptions | General advertisements, unsolicited applications, or relationships unrelated to the startup |
| Remedies | Injunction, damages, accounting, forfeiture, or other remedies permitted by the agreement and law |
Why Clear Wording Matters
Courts are more likely to enforce a restriction when its language shows precisely what the parties intended. In Century Properties, the Court relied on the clarity and unambiguous wording of the non-compete and compensation-forfeiture provisions. [Century Properties, Inc. v. Babiano, et al. (2016)](#J1.10)
A clause should therefore avoid indefinite expressions such as “any person connected with the company” or “any customer known to the founder.” It is preferable to identify the persons, accounts, territories, activities, and period covered by the undertaking.
The agreement should also avoid treating a breach as automatically established merely because a former founder later works with a former colleague or client. The company should be able to show the prohibited solicitation or other conduct contemplated by the clause.
Can the Startup Immediately Obtain an Injunction?
An injunction may be available when the agreement expressly permits injunctive relief and the company can establish the required legal grounds. A contractual provision stating that damages may be inadequate and that the company may seek injunctive relief can support the company’s position, but it does not automatically guarantee the issuance of an injunction.
The startup should preserve evidence showing the threatened or completed solicitation, including communications, recruitment proposals, client transfers, access logs, download records, and public announcements. It should also identify the contractual provision allegedly breached and the business interest requiring protection.
Courts may consider whether the restriction is clear, whether the conduct falls within its terms, and whether the requested relief is proportionate to the alleged breach.
Which Tribunal Has Jurisdiction?
The proper forum may depend on the parties’ relationship and the timing of the alleged breach. If the claim concerns a post-employment contractual obligation and seeks damages based on a breach occurring after employment ended, the claim may be a civil-law controversy for the regular courts rather than a labor case.
In Esico v. Alphaland Corporation, et al., G.R. No. 216716, March 16, 2021, the Supreme Court explained that employer claims for damages based on breach of contract arising after the cessation of employment are governed by civil law and fall within the jurisdiction of the regular courts. The Court also noted that a non-compete clause providing for liquidated damages may refer to post-employment relations. [Esico v. Alphaland Corporation, et al. (2021)](#J2.23)
Where the dispute principally concerns wages, illegal dismissal, or terms and conditions of employment, labor jurisdiction may be implicated. The complaint should therefore be characterized according to the real nature of the claim, not merely according to the label used by the parties.
What If the Clause Appears in a Letter of Intent?
A non-solicitation obligation contained in a letter of intent may be difficult to enforce if the document was intended only as a preliminary expression of interest. The court or arbitral tribunal may examine whether the clause was complete, whether the signatories had authority to bind the company, and whether the parties intended the provision to operate independently from the contemplated transaction.
Adapon v. Medical Doctors, Inc., G.R. No. 229956, October 19, 2021, involved arguments concerning whether a non-compete provision in a letter of intent was complete and binding, whether the persons who signed the document had authority, and whether the provision could stand independently from the other terms. [Adapon v. Medical Doctors, Inc. (2021)](#J3.7)
Founders should not rely on a vague letter of intent to protect the startup’s workforce or client base. If the parties intend an immediate and enforceable non-solicitation obligation, that intention should be stated expressly and supported by a complete set of terms.
How Do Confidentiality and Non-Solicitation Duties Work Together?
Non-solicitation provisions should be paired with confidentiality obligations. A former co-founder may be able to solicit a client or developer only by using information obtained through the startup, such as private contact details, compensation data, product plans, pricing information, or client preferences.
The agreement should define confidential information broadly enough to protect legitimate business information but not so broadly that it claims ownership over information that is public, independently developed, or lawfully obtained from another source.
The company should also control access to confidential information through account permissions, repositories, device-management policies, exit procedures, and documented return or deletion requirements. Contractual protection is stronger when supported by consistent operational safeguards.
Can a Breach Result in Forfeiture of Commissions or Benefits?
A contract may provide for forfeiture of specified commissions, incentives, or other benefits upon breach, but the provision must be clear and legally defensible. In Century Properties, the Court considered an express provision stating that compensation, including commissions and incentives, would be forfeited upon breach of the employment contract. [Century Properties, Inc. v. Babiano, et al. (2016)](#J1.10)
Founders should carefully distinguish between unpaid earned compensation, vested equity, unvested equity, discretionary bonuses, and benefits conditioned on continued compliance. A provision that attempts to cancel vested rights or earned compensation without a clear contractual and legal basis may generate a separate dispute.
Does the CPRA Affect Lawyer-Founders or Law-Firm Advisers?
Where a lawyer-founder, law firm, or lawyer representing the startup uses public platforms to promote legal services, the lawyer must comply with the advertising and non-solicitation requirements of the Code of Professional Responsibility and Accountability, A.M. No. 22-9-1-SC.
Section 17 permits advertising only through dignified, verifiable, and factual information and prohibits self-laudatory advertising. It also prohibits giving benefits or consideration to media practitioners, award-giving bodies, professional organizations, or personalities in exchange for publicity or recognition intended to attract legal representation or retainership. [Code of Professional Responsibility and Accountability (2023)](#L1.23)
This rule concerns the professional conduct of lawyers and should not be confused with a private contractual restriction governing a startup founder’s recruitment of employees or solicitation of clients.
Typical Startup Scenarios
Recruitment of developers. A departing founder privately messages the startup’s lead engineers and offers positions in a competing company. This may constitute prohibited solicitation if the agreement clearly covers the engineers and the founder’s conduct falls within the restricted period.
Client diversion. A founder uses confidential customer lists and pricing information to persuade the startup’s largest customers to move to a new venture. This may support claims for breach of contract and misuse of confidential information, subject to the terms of the agreement and available evidence.
Unsolicited client contact. A former client independently contacts the departing founder without inducement. Whether this is prohibited depends on the wording of the agreement, particularly whether it bars only solicitation or also acceptance of business from covered clients.
General recruitment advertisement. A new company posts a public job advertisement that is not directed at the startup’s personnel. A clause that expressly excludes general advertisements may reduce the risk of an overbroad interpretation.
Steps for Enforcing the Clause
- Review the contract. Confirm the parties, duration, protected persons, prohibited acts, remedies, and dispute-resolution provisions.
- Preserve evidence. Secure relevant messages, emails, recruitment offers, client communications, access records, and transaction documents.
- Identify the protectable interest. Document the company’s relationship with the affected developers or clients and the potential harm from the solicitation.
- Send a measured demand. Identify the contractual provision, describe the alleged breach, require cessation, and reserve the company’s rights.
- Select the proper remedy and forum. Determine whether the dispute belongs before the regular courts, a labor tribunal, an arbitral tribunal, or another agreed forum.
Final Observations
A non-solicitation clause can help a Philippine technology startup retain its lead developers and protect major client relationships after a co-founder’s departure. Its effectiveness depends less on the label attached to the provision and more on whether the restriction is clear, limited, reasonable, and connected to a legitimate business interest.
Co-founders should negotiate these provisions before conflict arises. The agreement should identify the protected people and clients, define solicitation, establish a reasonable period, provide sensible exceptions, and coordinate the clause with confidentiality, intellectual-property, equity, and dispute-resolution terms.
The company should also maintain evidence of its relationships and confidential information. A well-drafted clause supported by consistent internal controls gives the startup a stronger basis to demand compliance or seek judicial relief when a departing founder attempts to take the company’s people or business.
About Nicolas and De Vega Law Offices
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