Relationships Matter in Business and Life

Over the past few months, I’ve noticed that a number of business people on LinkedIn have shared personal stories of tragedy, triumph, and love in their life. These stories made me reflect on my own life and my personal philosophy on business. Being an entrepreneur or small business owner requires a lot of personal sacrifice and devotion to one’s business. But no business venture is worth pursuing if it comes at the cost of losing valuable relationships. In today’s article, I am going to discuss why relationships matter in business and life.

Friedman’s Flaw

In his often quoted “Friedman Doctrine”, Milton Friedman states that a business has no social responsibility to the public or society, it only has responsibility to its shareholders. He argues that a focus on social responsibility shouldn’t come at the cost of reduced profits for shareholders, increased prices for customers, or reduced wages for employees. Further, people could prioritize social responsibility in their own private lives once profits were achieved, prices were reasonable, and wages were paid. 

I believe that this maxim is not only wrong, but it’s dangerous. Now don’t get me wrong, profit maximization, low prices, and steady wages are essential components to running a successful business and make up the basic elements for capitalist competition. I am also not at all diminishing the role capitalist competition plays in improving the quality of life for the human race and the social benefits of such improvements. But the very fabric of civil society is predicated on the social responsibility we have to be good to one another and its foundation is in our relationships. If we don’t prioritize our relationships in a business context and focus solely on competitive advantage, we run the risk of devolving into a social darwinist society where our fundamental human value is defined by our material resources and genetics. A pretty gloomy outlook if you ask me. 

Relationships Drive Better Outcomes

Looking at capitalism through the perspective of evolutionary game theory, it is possible to preserve relationships while harnessing the forces of capitalist competition for good. Relationships are established when we have repeated interaction with other people. In his influential work, “The Evolution of Cooperation”, political scientist Robert Axelrod argues that if we cooperate in these repeated interactions with others it can lead to a net benefit for both parties. He substantiated this by running several hundred iterations of the famous Prisoner’s Dilemma (a traditionally zero-sum game) in a tournament context to find the optimal strategy for success in competition. Those participants who were initially cooperative with others, not envious of others’ success, had genuine motives, and were only retaliatory upon provocation had better long term success outcomes than those who only sought self-maximization.

If we apply these principles to a business context, we’ll find that it makes sense to prioritize cooperation in our relationships. By cooperating with others, we’ll develop a good reputation as business owners. If we have a good reputation, people will want to work with and transact with us. And ultimately, if people want to work with and transact with us, we’ll be successful. Conversely, we can identify situations where only self (or profit) maximization led to negative business outcomes. Anybody remember the financial crisis of 2008? A lot of sexy shareholder returns predicated on the deception of prospective homeowners until the tide came in and nearly everyone went bankrupt.

Relationships & Happiness

But enough academic arguments for now. I believe there is a more fundamental, emotional reason why relationships matter in business and life. Prioritizing relationships creates long term happiness. Humans are innately social creatures that need community and acceptance from others to survive and thrive. There is no amount of material success in business that can substitute for the feeling of belonging in our relationships. If our life is one large plot of scorched earth to achieve success, we’ll have no soil left for the vegetation of friendships and love that sustain us. This life is a gift and it is short. Do you want to spend your limited time destroying others or building them up? Do you want to be remembered as the person that had to win at all costs, even if it meant losing valuable people in your life? The choice is yours, but regardless of what you choose, always remember, relationships matter. 

<em>About the Author</em>
About the Author

Joseph Shanley serves as the Principal Attorney and Consultant for Awen Innovations, LLC. Click the button below to learn more about Joe and how he could help you fulfill your business dreams.

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Top Three Reasons to Adopt Document Automation Technologies

Jason Lee, Esq. – Celant Innovations

Document automation is the process of using technology to generate and change documents. Document automation technologies have been around for decades and serve a variety of business functions, including the creation of tax returns (i.e. TurboTax), contract automation (i.e. Celant Innovations), and estate planning documents for lawyers (i.e. Wealth Counsel). 

Document automation technology drastically improves document preparation speed. It typically reduces document preparation time by 70-90% because it trivializes tasks relating to searching and replacing key terms, inserting or deleting applicable language in appropriate locations, and including or excluding relevant documents automatically within a set of documents. 

If you are like most lawyers, you might not use document automation technology at your company.  This is often because it is very expensive to custom automate documents. Document automation software alone used to cost up to $200 per month per user. The software also required consultants to program the templates at around $250 per hour as well as a team of multidisciplinary specialists to program interview questions, the logic flow and the ultimate output documents.

But as with all things technology, software costs have come down substantially (approximately $25-75 per month per user) due to competitive market forces. Improvements in software design also drastically cut time and costs relating to setup and template preparation reducing consultant labor costs to around $100/hour, or in some cases fixed-fee arrangements. 

What this means is that document automation can very easily achieve excellent ROI, even for smaller companies and law firms. These reduced costs coupled with drastic labor shortages in the legal market provide an excellent opportunity to invest in document automation technology in the post-pandemic future. In this article, I discuss the top three reasons to adopt document automation technology.

Reason 1: Increase profitability by improving efficiency

For many fixed fee arrangement contracts, reducing the time it takes to prepare documents directly corresponds with increased profits.  For example, it is not uncommon to increase the productivity of your team by 100% or more by utilizing the document automation technology. This is because the technology allows for the production of more documents more accurately with less supervision.  With a proper document automation platform, all of the know-hows and insights of the organization can be embedded into the system, which eliminates transition problems when a staff member leaves the company. 

Even for variable fee arrangements, modern technology yields superior results by reducing errors and streamlined workflow, improving efficiency, customer satisfaction and cost advantages.   Smart managers can utilize these advantages to convert additional sales, break into new markets, and tap into new revenue opportunities.  In short, document automation can often be a game-changer for many of the businesses today. 

Reason 2: Increase revenue by increasing demand for your services

The web is a competitive space – a Google search yields numerous results for competitive goods and services.  The difference between being inundated with traffic vs. low traffic is often determined by how a product or service ranks in the Google search results.  We are all unfortunately at the mercy of Google’s SEO algorithm. However, that algorithm encourages the use of free tools (such as document automation technology) for users, because it makes Google searches more useful by providing links to the tool and increasing the site’s corresponding ranking.

And as such, numerous organizations invest substantial sums to create online tools to create documents, such as Cooley Law Firm’s Cooley Go, which has successfully used document automation as a demand generation tool by providing free tools such as Delaware Corporation documents to build goodwill and generate substantial traffic, many of which eventually convert to clients. 

While Cooley is a mega law firm with substantial resources to be an early implementer, continued innovation in the space now allows smaller organizations to have their products and services showcased on the internet by providing free, useful tools to drive traffic to their websites. 

Reason 3.   Increase passive income with a subscription business model

For purely service based companies like law firms, you start off the year at zero, earning your way back to last year’s sales figures all over again.  With a subscription model, you don’t “reset” your revenue, but continue to build from what you did the previous year.  Many law firms have successfully transitioned to membership-based business models by providing automated document generators for key documents, other non-automated documents and forms, and reduced hourly rates for membership companies.

Document automation technology plays a key role in subscription business models by generating reusable custom content. Without it, prospective clients download static content in the first month resulting in lost revenue opportunities.  It is the main reason to keep the subscription going from the client perspective, especially because changing regulations often require the latest updated automated forms and allows forward thinking attorneys to rapidly grow their practice and gain market share.  

   

Final Words

There you have it, the top three reasons why you should adopt document automation technologies.  Certain documents and practice areas lend themselves better to automation – for example, estate planning, lending, leasing, employee agreements, letters of intent, and other form centric industries.  However, even if your practice area is not form driven, automation can improve administrative workflow, as well as increase web visibility by way of free tools. 

Jason Lee, Esq. is the Founder and CEO of Celant Innovations. Celant Innovations offers full-service, contract automation solutions for loan officers, small to mid-sized law firms, and corporations. For more information on how to lower costs, improve productivity and improve confidence in documents by working with Celant Innovations, email Jason at [email protected].

How to Negotiate a Contract as a Freelancer

The freelancing economy is changing the way we work. Freelance work in the United States has grown by 22% since 2019 and accounts for over $1.2 trillion in the U.S. economy*. With demand for increased flexibility and autonomy, freelancing seems like a logical choice for many competent professionals. However, with this freedom comes responsibility. There is obviously the responsibility to do a good job for the client and maintain honest business practices. But, perhaps equally important, freelancers have a responsibility to value their business needs, especially when negotiating a contract with a new client. In this article, I discuss how to negotiate a contract as a freelancer. Please keep in mind that this is an overview and not legal advice. Every contract negotiation has unique facts and circumstances and requires individual analysis by a competent attorney.

Value Your Time

Whether you’re being paid hourly or on a flat fee basis, it is critical to value your time appropriately. Your rate should reflect the required time and energy to service your client, time away from other projects, and your industry experience. You should work with prospective clients to come up with a reasonable rate for their project, but not devalue your business in the process. Your work product likely adds long term value to your client’s business that far surpasses the time that your client pays for. So if they aren’t willing to value your business appropriately, consider referring them to another company.

Control the Scope

It is important to control the scope of work for the project, especially if it is a flat fee engagement. You should work with the client to define very clear deliverables and deadlines in the contract. However, there are times when the client doesn’t know what they need until they need it. If it is a flat fee engagement with a defined scope of work, you might consider including an hourly rate for any additional work in the contract. This allows flexibility for the client, while making sure you are fairly compensated for additional services.

Define the Compensation Structure

Once you determine a rate for your project, it’s important to define how and when you will get paid. Some freelancers prefer lump sum payments up front and upon completion of the project. Others prefer installment payments at specific time intervals or upon meeting certain benchmarks. The compensation structure is largely up to you and the client, but make sure you put it in writing so everyone understands their obligations.

Identify Additional Personnel

You may require additional help when servicing the client. It is important to identify or at least discuss the possibility of using subcontractors for a new project. This transparency lets the client know who they are working with and allows the parties to adjust the terms of the contract to account for these third parties.

Intellectual Property Assignments

Make sure you understand what happens to any intellectual property created during the project. Most times freelancers assign the rights, title, and interest to all intellectual property and must assist the client in obtaining any intellectual property rights. Common intellectual property rights include copyrights, patents, trademarks, trade secrets, and moral rights. Assigning intellectual property rights also means you cannot reuse the work product for any purpose other than what is authorized by the client. If you do not fully understand the consequences of assigning your intellectual property rights, then you should retain a lawyer to review the contract before signing.

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The Essential Elements of an Engagement Letter

Retaining an attorney is one of the most significant decisions you’ll make as an entrepreneur. You are putting personal and professional trust in their judgment, so you need to make sure you start the relationship off on the right foot. Engagement letters are critical for defining a good attorney-client relationship. You should always request that the attorney or their firm send one prior to beginning their representation of your business. In this article, I discuss what essential elements you should look for in an engagement letter.

Contact Information

The engagement letter should list the attorney, the firm, and any contact information you might need. By having this information in one place, communications with your attorney are more streamlined. It also ensures that you know whether you are dealing with a legitimate firm.

Who is the Client?

The engagement letter should clearly identify who the attorney represents as their client. This seems straightforward, but that isn’t always the case. For example, the client could be your company, in which case the attorney wouldn’t necessarily represent the individual founders. Or, the client could be one of the individual founders, in which case the attorney wouldn’t necessarily represent your company. Identifying the client at the outset avoids any potential conflicts of interest down the road.

The Scope of Representation

The engagement letter should define any scope or specific deliverables for the representation. For example, a business transactional lawyer may not feel comfortable handling any prior present, or anticipated litigation against your company. If this is the case, then the engagement letter should explicitly exclude litigation matters from the scope of representation. Similarly, if the representation is only for specific deliverables such as contract drafting, those deliverables should be clearly spelled out. Properly defining the scope of representation ensures an alignment of expectations for the attorney-client relationship.

Duties & Obligations

The engagement letter should explain the duties and obligations inherent to your attorney-client relationship. Two of the most important duties are attorney-client privilege and the duty of confidentiality.  Written and oral communications with your attorney that relate to the representation are generally privileged and confidential. Similarly, attorneys have a duty to keep such information privileged and confidential, unless privilege is waived by the client. The engagement letter should clearly explain attorney-client privilege, the duty of confidentiality, instances when privilege is waived, and general expectations around communications.

Fee Structure & Payment Procedures

The engagement letter should explain how the attorney will bill for their services and any specific payment procedures. Common fee structures include: hourly billing, retainers (or advanced payments held in a trust account until services are provided), and flat fees for services. The letter should also explain invoicing details, billing cycles, acceptable payment methods, and any other appropriate procedures surrounding your payment for the services.

Dispute Resolution

There are unfortunately circumstances where the attorney-client relationship breaks down and litigation ensues. The engagement letter should identify any dispute resolution procedures such as mediation or litigation, the appropriate venue for disputes, and the governing law for the agreement. Remember, the engagement letter is a contract just like any other agreement. So you’ll want to understand what legal recourse you have in the event things go south.

Termination

The engagement letter should address any termination procedures for when the attorney-client relationship concludes. This section should explain any ongoing attorney-client obligations owed to the client, file retention processes, and procedures for potential re-engagement in the future.

<em>About the Author</em>
About the Author

Joseph Shanley serves as the Principal Attorney and Consultant for Awen Innovations, LLC. Click the button below to learn more about Joe and how he could help you fulfill your business dreams.

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Understanding Software Licensing Agreements versus SaaS Licenses

Tyson Benson, Vivacqua Crane, PLLC

Software vendors use multiple agreements to govern their relationships with clients and protect their intellectual property.  The most common agreement types are software licensing agreements and Software as a Service (SaaS) licenses.  It is imperative for software vendors to understand when to use these agreements when transacting with clients and end users. This article discusses the critical distinctions between software licensing agreements and SaaS licenses to inform more effective business practices for software vendors.

Software Licensing Agreements

A software licensing agreement is a legal instrument that governs the redistribution or the use of software.  Software vendors typically own the copyright to their software. The copyright laws effectively provide the software vendor a monopoly over the right to reproduce and distribute the software. Thus, a recipient of the software must receive a copyright license to copy and use the application on their computer.

One type of software licensing agreement is an end-user licensing agreement (EULA). Video game companies commonly create EULAs to govern the use of interactive role playing video games (RPGs). RPG EULAs grant a license to the gamer to install and store a copy of the gaming software on their computer.  RPG EULAs typically include additional license limitations such as prohibitions against using cheat codes, making modifications to the software, and granting sub-licenses to other gamers. Such limitations become critical when defining the ownership of intellectual property rights in the RPG software.

SaaS Licenses

A SaaS license is a legal instrument that governs a client’s use of a software service provided and hosted by a software vendor. One common SaaS license found in the business world is for the use of cloud computing services like Amazon Web Services (AWS). AWS’s cloud computing software is never downloaded on a user’s computer because it is hosted on Amazon’s web servers and accessed by the user through the Internet. Unlike RPG EULAs, copyright laws are not invoked since the user does not download a copy of the software on their computer.  In other words, AWS’s SaaS license governs the user’s access to Amazon’s software service via the internet for the term of the agreement. Typical provisions SaaS licenses govern the user’s right “to receive the Service” during the subscription period, data ownership allocation, and various security considerations.

Key Takeaway

Software vendors should use software licensing agreements when the software is copied to the user’s computer and that user receives a license to reproduce and utilize the copyrighted software and should use SaaS licenses when the software is provided as a service accessible over the Internet.

Tyson Benson is a patent attorney with Vivacqua Crane PLLC, an intellectual property law firm specializing in intellectual property procurement, protection, and strategy. Tyson has served clients ranging from startups to universities to Fortune 500 companies in obtaining patent protection in a wide variety of new and emerging technologies.

The Operating Agreement: Basic Provisions

Starting a business with partners can be fun, but complicated. Many entrepreneurs even recruit their family and friends as co-founders to get things off the ground. They tend to believe mob boss Michael Corleone’s assertion that “It’s not personal, it’s strictly business”. I disagree. Business can become deeply personal, especially when there are disputes or close relationships at stake. That’s why it is critical to lay out some rules of the road prior to beginning a new venture with other people. If your company is organized as an LLC, then creating an operating agreement is an effective way to accomplish this. In this article, I discuss the basic provisions in operating agreements. Please keep in mind that this is an overview. You should always seek legal counsel when drafting an operating agreement for your business.

What is an Operating Agreement?

The Michigan Limited Liability Company Act (LLCA) defines an operating agreement as a “written agreement between all the members of an LLC that pertains to the affairs of the company and the conduct of its business”. You don’t need an operating agreement to start a business in Michigan, but they’re still incredibly useful.  To expand on the LLCA’s statutory definition, I believe an operating agreement has two objectives. It explains how a business operates and how the people in a business relate to each other. Let’s take a closer look at how these objectives work in practice by exploring some basic operating agreement provisions.

Identifying the Members

An operating agreement should identify the parties and their ownership interests. The parties or owners in an LLC are called members.  Both individuals and legal entities can become members. An operating agreement typically lists the members’ identifying information, including but not limited to, names, addresses, emails, and telephone numbers to make company communications more streamlined. The members make initial capital (money or property) contributions to the LLC in exchange for ownership in the company, otherwise referred to as a membership interest. Membership interests carry specific voting and economic rights in the business. Please keep in mind that there are exceptions to these rules. For example, a party may become a member of an LLC without contributing capital or a membership interest may only carry economic rights. These scenarios and others are beyond the scope of this article and require an attorney to evaluate the specific circumstances. Operating agreements also may have capitalization tables, which identify the member, their voting percentage (if any), their economic ownership percentage, and their initial capital contributions.

Management

An operating agreement should define how the LLC is managed. LLCs are generally either member-managed or manager-managed. In a member-managed LLC, the members collectively make all company decisions. In a manager-managed LLC, the members elect a professional manager or one of the other members to make company decisions. There are also scenarios where the LLCs are a hybrid of both management structures. For example, in a manager-managed LLC, the manager might make day-to-day operations decisions, while the members make significant decisions like selling the company or admitting a new member. The operating agreement can also include decision making procedures. Examples of these procedures are meeting & voting processes, the standard of care for decision making, compensation for management activities, how the LLC transacts with other individuals or entities, and liability for decision making.

Contributions, Distributions, and Allocations

An operating agreement should identify procedures for how capital (money or property) comes in and out of the company. In addition to receiving their membership interest, a member’s initial capital contribution creates their capital account. As the business progresses, the company may request additional capital contributions from the members or make capital distributions to the members. The member’s capital account is generally adjusted to reflect these capital contributions or distributions. Adjustments to a member’s capital account can also affect that member’s allocation of the profits and losses of the LLC. If a member does not make capital contributions in a timely manner, the operating agreement can determine how it affects their rights to capital distributions or their allocation of profits and losses.

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Five Tips for Choosing the Right Attorney for Your Business

There comes a time in every business owner’s career when they need to retain legal services.  For some, shopping for an attorney can be rather intimidating.  So it is essential to be prepared in order to make the best choice. In this article, I offer five tips for choosing the right attorney for your business.

(1) Research the Firm

Understanding who you are going to work with is critical when choosing the right attorney for your business. You’ll want to do some background research before you walk into any law office. Has the attorney represented anyone in your network? If so, ask that individual or business about their experience. If not, make sure to read client reviews on Google, Avvo, or other third-party sources to get a better understanding about their reputation. Does the attorney have experience representing companies in your industry? For example, a food and beverage company may have very different legal needs than a technology startup. Retaining an attorney with relevant industry experience can help maximize the value of your professional relationship. Finally, try to review any material the attorney has recently published. Blog posts, YouTube videos, and other forms of content provide a good picture of the attorney’s expertise and can help you determine whether they can assist your business.

(2) Understand Your Business

The better understanding you have of your business and long-term objectives, the more helpful an attorney can be. At the end of the day, it is your company and livelihood at stake. Attorneys are also quite expensive, so the more information you bring to the table the more effective use you can make of their time. Review and compile any legal documents, organizational charts, business plans, financial statements and projections, or market analyses that have been created. Also be prepared to be transparent, attorneys really don’t like surprises. It’s okay if you don’t have all the answers, but don’t withhold information that could be critical to receiving effective advice.

(3) Ask Questions

Make sure to ask questions about the attorney’s experience and professional standing. How long have they been in practice? Have they represented similar businesses? Do they have a professional network that could help your company? What makes their firm different from others? These types of questions will give you a more comprehensive look at who you are dealing with and whether they are a good fit.

(4) Take Your Time

Enlisting the help of an attorney is a serious investment of time and money, so you need to make sure you hire the right person. Before signing an engagement letter, take some time to think about your first meeting. Did the attorney appear knowledgeable? Were they friendly and enthusiastic about your business? Did they clearly communicate in plain english, or use a lot of legal jargon? Do you have any follow-up questions or concerns? Trust your gut. If it didn’t feel right, you should probably look elsewhere.

(5) Ask for an Engagement Letter

Once you’ve decided the firm is a good fit, make sure that they send you an engagement letter prior to commencing the attorney-client relationship. The letter should clearly spell out the scope of representation, their duties and obligations to you as a client, their fee structure, their invoicing & payment methods, and any termination procedures. This information sets clear expectations as to how the relationship will work to help avoid any potential future issues.

<em>About the Author</em>
About the Author

Joseph Shanley serves as the Principal Attorney and Consultant for Awen Innovations, LLC. Click the button below to learn more about Joe and how he could help you fulfill your business dreams.

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Joe Shanley Appointed to SBM Affordable Legal Services Committee

Earlier this month, the State Bar of Michigan appointed Joe Shanley as a member of its Affordable Legal Services Committee. Joe Shanley is the founder and principal attorney for Awen Innovations.

Approximately 80% of people of poor to moderate means do not get the civil legal assistance they need. The Affordable Legal Services Committee hopes to change that. Their primary mission is to provide access to low-cost legal services to Michigan’s most vulnerable citizens. Some current proposals include developing low bono services, online dispute resolution, and alternative fee agreements.

Joe hopes to leverage his experience as an entrepreneur and attorney to develop these innovative practices as well as other ideas. He also brings an extensive network of business and legal professionals with vast expertise to help achieve these goals. Congratulations, Joe!

Michigan LLC Annual Statement Filing Requirements

Michigan Limited Liability Companies (LLCs) must file an annual statement with the Corporations Division of the Department of Licensing and Regulatory Affairs (LARA) every year to keep their business in good standing. In this week’s article, I discuss the requirements for filing Michigan LLC annual statements. Please note that this article does not discuss separate statutory requirements for Professional Limited Liability Companies or Foreign Limited Liability Companies.

What is an Annual Statement?

The annual statement is an official document filed with LARA that lists the street address and mailing address of an LLC’s registered office and the LLC’s registered agent.

When should I file?

Every year Michigan LLCs must file their annual statement by February 15th. If the LLC is formed after September 30th, then no annual statement filing is required for the next year.

When will I receive notice to file?

LARA sends a pre-printed annual statement to every Michigan LLC’s registered office approximately three months before the filing deadline. This pre-printed form gives businesses notice of their filing requirements.

How do I file an Annual Statement?

There are three methods for filing Michigan LLC annual statements.

  • Online: Submit the annual statement and filing fee using LARA’s online filing system.
  • By Mail: Mail the annual statement and filing fee to LARA’s Corporations, Securities & Commercial Licensing Bureau at P.O. Box 30018, Lansing, MI 48909.
  • In Person: Deliver the annual statement and filing fee to LARA’s Corporations, Securities & Commercial Licensing Bureau office located at 2407 N. Grand River Ave., Lansing MI 48906.
How much does it cost to file an Annual Statement?

It costs $25 to file a Michigan LLC annual statement through September 30, 2023. After September 30, 2023, annual statements will cost $15 to file.

Are there any late fees for filing the Annual Statement after the deadline?

There are no late fees for missing the filing deadline. However, Michigan LLCs still must file annual statements and pay filing fees every year.

What happens if I don’t file an Annual Statement?

When a Michigan LLC fails to file an annual statement for two consecutive years, LARA sends a notice describing the consequences for the failure to file. Once the LLC receives this notice, it has 60 days to file all outstanding annual statements and pay any filing fees owed. If no corrective action is taken within 60 days, then the LLC will not be in good standing with the state. If the LLC is not in good standing, it won’t receive a Certificate of Good Standing from LARA, its name will be available for use by other entities, and LARA won’t accept any of its filings. Michigan LLCs that aren’t in good standing can still operate their business in the state.

If my LLC isn’t in good standing, how do I restore it?

Michigan LLCs that aren’t in good standing can file a Certificate of Restoration of Good Standing. This certificate costs $50 to file and must include all outstanding annual statements and filing fees. It should also include the name of the LLC when it ceased to be in good standing, the name of the LLC’s registered agent, the LLC’s registered office address, and a written statement confirming that all outstanding annual statements and filing fees are attached. The LLC must select a new trade name if another business claimed their name while the entity was not in good standing.

Additional Resources
<em>About the Author</em>
About the Author

Joseph Shanley serves as the Principal Attorney and Consultant for Awen Innovations, LLC. Click the button below to learn more about Joe and how he could help you fulfill your business dreams.

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Non-Compete Agreement Basics for Small Business Owners

Non-compete agreements (or Non-competition agreements) are used in contracts to prevent one party from directly competing with another party in the same industry or profession. You’ll typically see them in employment agreements to prevent employees from using a company resources or information to benefit competitors. Or worse, to harm their employer. Yikes. This past July, the Biden administration issued an executive order “to curtail the unfair use of Non-compete clauses that may limit work mobility” in order to promote competition in the economy. And it’s true, Non-compete agreements can affect a person’s ability to make a living, which makes prospective employees hesitant to sign them. That’s why it’s important for small business owners to understand the basics of Non-compete agreements so that they and their lawyers can create contracts that work for everyone.

Non-Compete Agreements must be reasonable

Michigan courts view Non-compete agreements as restraining or preventing commerce. As a policy matter, we want as few restraints on commerce as possible to promote economic growth and competition. To determine whether a Non-compete is enforceable or not, Michigan courts evaluate how reasonable the provision is in order to avoid unnecessary restraints on commerce. Reasonableness of Non-competes hinges on several factors that I’ll discuss below.

Protect Reasonable Competitive Interests

Employers can’t arbitrarily prevent an employee from working for a direct competitor just because they are in competition. A Non-compete agreement may be appropriate when the employee has access to information or resources that the employer has a reasonable competitive interest in protecting. This could include proprietary knowledge, trade secrets, customer lists, or financial information. Ever wonder what’s in the McDonald’s Big Mac sauce? So does Burger King. How about the algorithm that allows YouTube to curate your favorite cat videos? Vimeo might want to learn about that one, too. Non-competes are good tools to prevent this non-public information from disclosure in order to protect that competitive business interest.

Set Reasonable Geographic Limitations

Employers should set reasonable geographic limitations when using Non-competes. Let’s take the example of a Michigan business owner that only serves Michiganders. A court might find it unreasonable for the business owner to require their salespeople to sign Non-competes that cover a national territory. Whereas a global technology company might require a larger geographic scope in their Non-compete agreements to adequately protect their business interests. The bottom line is that geographic limitations should correspond to the realities of the business.

Create a Reasonable Time Period

Non-competes can’t last forever. People have to eat after all. The type of industry and business interest ultimately informs how reasonable the time period is for the Non-compete to be enforceable. Faster-paced industries generally have shorter time horizons and vice versa. It’s important to retain a lawyer with industry-specific experience to determine what time horizon is appropriate for your business.

Non-Compete Agreements must prevent irreparable harm

There are some things money can’t buy and legal damages in a Non-compete case is one of them. The business interest the employer wants to protect must be so valuable that the company would not be able to repair the damage if it were to be disclosed. The top secret formula for Coca Cola is a great example here. An employee disclosing the formula to a competitor could cause a copycat beverage to surface and seriously diminish Coca Cola’s competitive position in the market. If some individual or entity could pay a settlement to make those companies whole after improper disclosure, then the harm to the business is not irreparable.

Different Parties, Different Standards

It’s important to understand the type of parties involved when enforcing a Non-compete. In this article, I’ve primarily discussed Non-competes in employer-employee relationships. Businesses that contract with other businesses can also use Non-competes. However, those agreements are held to different standards than employment agreements. Thus, the intent and scope of the Non-compete must be tailored to the specific parties to the agreement.

Additional Sources
<em>About the Author</em>
About the Author

Joseph Shanley serves as the Principal Attorney and Consultant for Awen Innovations, LLC. Click the button below to learn more about Joe and how he could help you fulfill your business dreams.

Learn More