Non-Compete Agreements: What Entrepreneurs Should Know

Non-compete agreements can protect businesses, but they also come with risks and legal limitations. In cities like Boulder and Kansas City, where startups and small businesses thrive, understanding these agreements is crucial for both employers and workers. Whether you’re launching a startup, hiring employees, or transitioning into freelancing, understanding non-competes is essential to avoid costly mistakes.

(You may also want to check out our guides on non-disclosure agreements and non-solicitation agreements, which are closely related to non-compete provisions.)

What is a Non-Compete Agreement?

A non-compete agreement is a contract provision that restricts an employee (and sometimes a contractor) from competing with a business after leaving the company. Despite common misconceptions, non-competes are enforceable in most states, including Colorado (with some limits), Kansas, and Missouri. However, courts generally will not enforce overly broad restrictions that do not protect a legitimate business interest.

One major exception is California, where most employment-related non-competes are unenforceable by law.

Common Limitations on Non-Competes

Each state has different rules on non-compete agreements, but most courts require reasonable limitations in scope. A valid non-compete should:

• Be limited in time – Most enforceable non-competes last six months to two years after employment ends.
• Be limited in geographic scope – Restricting competition within 50-100 miles of the company’s location is common, but for businesses that operate remotely or nationwide, restrictions should be tailored to areas where the employee worked.
• Clearly define competition – Instead of banning an employee from an entire industry, businesses may limit competition to direct competitors or specific client types (e.g., an accounting firm that serves nonprofits may restrict employees from working with nonprofit clients but not in accounting overall).

How to Use a Non-Compete Effectively

A non-compete agreement is just one piece of a broader strategy to protect your business. You should also consider non-solicitation agreements and non-disclosure agreements (NDAs) to safeguard client relationships and trade secrets.

Practical Tips

• Standalone or integrated? A non-compete can be a separate document or included in an employment agreement, NDA, or contractor agreement.
• Make it clear – The agreement should be easy to understand and explicitly signed by the worker.
• Consider enforceability – Not all situations justify a non-compete, and overly restrictive agreements can backfire.

The Debate Around Non-Competes

While non-compete agreements can protect businesses, they also limit worker mobility and wages. States that strongly enforce non-competes may see reduced innovation and talent loss, as skilled professionals may relocate to states with fewer restrictions (like California). Because of this, I usually say that non-competes should only be used when truly necessary. In many cases, a non-solicitation agreement is a better option to prevent former employees from taking clients without restricting their ability to work.

*This article is general in nature and is not legal advice.