Resources / Glossary / Non-compete

Non-compete.

Aka. Non-competition covenant · NCA
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What is a non-compete?

A non-compete is a contractual promise not to engage in a competing business for a defined period and within a defined area. In an acquisition, it is the seller's promise not to turn around and rebuild the very business they just sold; in employment, it is a key employee's promise not to join or start a competitor after leaving.

In M&A, the non-compete protects the value the buyer paid for. A buyer purchasing a company is largely buying its customers, know-how, and goodwill — assets that walk out the door if the founder can immediately launch a rival. The covenant locks that value in place for long enough for the buyer to integrate and retain it.

Enforceability is the defining issue. Courts and statutes vary widely on whether and how far non-competes can be enforced, and the rules differ sharply between the deal context and the pure employment context — a non-compete tied to the sale of a business is generally treated far more favorably than one imposed on an ordinary employee.

How a non-compete is structured

A defensible non-compete is bounded on three dimensions, each scoped no broader than needed to protect the legitimate interest at stake.

  1. Duration. The length of the restriction. Deal-related non-competes covering a seller tend to run longer than employment non-competes, because the buyer is protecting purchased goodwill rather than restraining a worker.
  2. Geography. The territory where competing is barred, usually tied to where the business actually operates and serves customers.
  3. Scope of activity. The specific lines of business or activities prohibited, defined narrowly enough to map to the actual business being protected rather than barring the person from an entire industry.
  4. Consideration. What the restricted party receives in exchange — the purchase price in a deal, or compensation in employment — which courts weigh in deciding reasonableness.

Overbroad covenants risk being narrowed or struck down entirely, so well-drafted ones are deliberately conservative on time, place, and activity.

Why enforceability is the whole game

A non-compete is only worth what a court will enforce, and that varies enormously by jurisdiction. Some places enforce reasonable covenants readily; others restrict or prohibit them, particularly in the employment setting, and the regulatory landscape around employee non-competes has been actively contested. The sale-of-business context is consistently treated more leniently, because both sides bargained at arm's length and the seller was paid for the restriction.

The practical takeaway is that the same words can be fully enforceable in one jurisdiction and void in another, and a covenant that is reasonable for a paid-out founder may be unenforceable against a rank-and-file employee. This is why non-competes are usually paired with non-solicit and confidentiality covenants, which tend to be more reliably enforceable and protect overlapping interests.

Frequently asked.

5 questions
01 How is a non-compete different from a non-solicit?

A non-compete bars the person from engaging in a competing business at all. A non-solicit is narrower — it only bars them from soliciting the company's customers or employees, while leaving them free to compete generally. Non-solicits are usually easier to enforce because they restrain conduct rather than a person's whole livelihood.

Deals frequently include both, since they protect overlapping but distinct interests.

02 What makes a non-compete enforceable?

Generally, that it is reasonable in duration, geography, and scope of activity, supported by adequate consideration, and tied to a legitimate protectable interest. Enforceability varies significantly by jurisdiction, and courts may narrow an overbroad covenant or refuse to enforce it altogether.

03 Why are non-competes treated differently in a sale versus employment?

In a sale of a business, the seller is paid for the covenant and bargains at arm's length, so courts treat it as protecting purchased goodwill and enforce it more readily, often for longer terms. In ordinary employment, the imbalance of bargaining power makes courts and regulators far more skeptical, and some jurisdictions sharply limit or ban employee non-competes.

04 How long do non-competes typically last?

It depends on context and jurisdiction. Non-competes tied to the sale of a business tend to run longer because they protect acquired goodwill, while employment non-competes are generally expected to be shorter and more narrowly scoped to be enforceable. There is no universal figure — reasonableness for the specific situation is the test.

05 Why does the exact non-compete language need to stay findable?

Because whether a former founder or employee has actually breached turns on the precise duration, territory, and activity scope agreed in the document — and those details get tested only when a dispute arises, often years later.

Keeping every covenant tied to the deal or employment record means the company can check the exact terms the moment a competitive concern surfaces, rather than reconstructing them under pressure.

Related terms

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Information rights

An investor's contractual right to receive the company's <em>financials and key data</em> on a set schedule — and often to inspect its books and records.

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Indemnification cap

The ceiling on how much a seller can be required to pay a buyer for breaches of the deal's representations — the maximum dollar exposure after close.

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Board control

Holding enough seats to command a majority of board votes — the power to <em>decide</em> the matters that the board, not shareholders, controls.

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Survival period

How long after close a deal's representations and warranties remain enforceable — the window in which a buyer can bring an <em>indemnification claim</em>.

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Plegal governance

Protective provisions

A list of company actions that require investor consent before they can be taken — the <em>veto rights</em> that protect a minority preferred holder.

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Pro rata rights

An investor's right to invest in future rounds enough to <em>maintain its ownership</em> percentage and avoid dilution.

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