Break Away From The Pack

Can someone starting a breakaway firm hire former co-workers?

On Behalf of | Mar 11, 2024 | RIA Formation |

Those who work in financial management or investments can enrich their clients and earn a very competitive living if they are successful at what they do. Those who work for existing investment entities often realize that their arrangements limit their income and career development. Creating a breakaway investment firm allows someone with a history of successful financial management or investments to optimize their career.

They have more control over their schedule and their investment practices when they begin their own breakaway firm. They also stand to increase their personal share of the profits generated through their investment activity. However, the breakaway process is often rife with legal risks for the employee-turned-entrepreneur.

Frequently, the established firms that hire investment professionals also require that they sign complex employment contracts. The inclusion of restrictive covenants is a common practice. The terms in someone’s employment contract could limit their activities when they first start up their breakaway firm. Can someone potentially hire their former coworkers when they want to develop a team at their new breakaway investment firm?

Restrictive covenants could open someone up to lawsuits

The terms of someone’s prior employment contract and the timeline for their hiring activities directly influence whether or not they may face allegations of inappropriate competition when hiring their former co-workers. Some companies include non-solicitation agreements in their employment contracts or the severance agreements they negotiate with exiting professionals.

Non-solicitation agreements may prohibit professionals from intentionally hiring people that they worked with at the company or trying to get clients to leave that firm to work with their new firm instead. Sometimes, non-solicitation agreements apply to both of those situations.

Like other restrictive covenants, non-solicitation agreements frequently have limitations on them that apply to both geographic regions and the timing of business decisions. If someone moves to a different jurisdiction or waits a sufficient amount of time, the decision to offer employment opportunities to professionals whom they know and trust might no longer lead to allegations that they breached an employment contract.

Being aware of the exact limitations generated by a non-solicitation agreement and also whether that agreement is likely valid and enforceable can help someone starting a breakaway firm make informed choices regarding staffing, marketing and client acquisition.