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Quitting to Start a Company? Employment Law Checks Before You Resign to Become a Founder
For future founders: what to read, keep and plan before the resignation letter.
Leaving your job to start a company? Employment law checks before you resign
Before you quit to start a company, find and read what you signed as an employee: your offer letter, employment and invention-assignment agreements, handbook, and equity documents. Check who owns what you’ve built, whether non-compete or non-solicit terms apply, what you can’t take with you, and what pay and benefits you’d leave behind.
Before you write the “I’m going all in” post
We’ve all read the “I’m going all in” LinkedIn posts by ambitious entrepreneurs announcing that they’ve resigned from their day jobs to dedicate themselves to their startups. Having taken this risk myself in founding multiple enterprises, I’m inspired by these reminders that great businesses start as bold ideas backed by courageous, risk-taking innovators. And it is truly inspiring: well over half a million applications for new businesses were submitted in the US in September 2026 alone, according to the US Census Bureau, and LinkedIn reported more than 70% year over year growth in “founder” profiles.
Unfortunately, aspiring entrepreneurs often do not consider the legal implications and hurdles they need to navigate in the transition from employee to founder. If you are an aspiring founder, there are essential employment law checks to consider before you resign and tell the world you’re going “all in”. If you don’t take these steps first, you risk damaging your new company before it’s even launched. The documents you signed years ago when you took your current job may decide who owns your ideas and client relationships, who you can hire, and how much money you will leave on the table. As a founder, you need to understand these details.
In this article, I explain the essential steps you should consider before you resign and “go all in” on your startup, and I offer a 10-point checklist for founders.
Why do employment documents matter when you start a company?
Your business starts as an idea, but your ability to implement that idea can be legally limited by the documents you signed with your employer. My idea that individual professionals deserve greater insight into their employment documents led to the creation of FairPlay Analytics – a proprietary system that provides AI-powered employment document analysis – and FairPlay Law, an affiliated AI-native employment law firm. What if I had developed that proprietary AI system and law firm while at a company with which I had signed an agreement impacting my ownership of those ideas? That could have significantly impacted my plan.
So before you launch your new venture, take the time to check your current employer documents. Do not wait until you are seeking funding and an investor doing their due diligence discovers that you do not actually own the IP or key client relationships that are essential to your business plan.
Who owns your startup idea: you or your employer?
If your business depends upon a unique idea, it’s advisable to confirm whether you or your employer owns that idea. As a general principle:
Check whether you’ve signed a Proprietary Information and Inventions Assignment Agreement (PIIAA) or a contract with similar language. It’s important to look for how “invention” is defined and the scope of how “related to the company’s business” is set in relation to such inventions. Check for a prior inventions list.
Consider whether your idea was created on your work computer, during work hours, using company accounts, code, or data, and any overlap with your employer’s business, as these can limit your legal ownership of your idea. Check laws in your state. California (Labor Code §2870) and New York (Labor Law §203-f) bar employers from enforcing invention-assignment provisions against inventions an employee develops entirely on their own time, without using the employer’s equipment, supplies, facilities or trade secret information. The protection does not apply to inventions that relate to the employer’s business or its actual or demonstrably anticipated research or development, or that result from work the employee performed for the employer.
Ownership of IP will be one of the very first questions outside investors ask when they do due diligence, and you do not want to find out after your business is a big hit that your former employer is taking legal action against you because you’re infringing on IP they own.
Does a non-compete stop you from starting your own company?
Non-competes have become increasingly common for many kinds of employees, and some policy makers have argued that their over-use limits beneficial innovation and competition. Nearly half (49.4%) of private sector employers use non-competes for at least some of their workers, according to a 2017 Economic Policy Institute survey cited by the Government Accountability Office.
However, there is no federal ban on non-competes: a 2024 Federal Trade Commission rule that would have barred most non-competes was formally removed without implementation in February 2026, and the agency now challenges specific non-competes one case at a time.
If you’re one of the 30 million Americans the FTC estimates to be bound by a non-compete signed with an employer, what state you live in determines how non-compete rules impact you. To name two examples:
California voids virtually all employee non-compete agreements and lets current, former and prospective employees sue to block them and recover damages and attorney’s fees. The statute applies regardless of where the agreement was signed, although courts in other states have not always honored that reach (Business and Professions Code §§16600 and 16600.5).
New York has no statute banning non-competes: a 2026 bill passed the state Senate but stalled in the Assembly, so New York courts still decide whether a non-compete is enforceable based on the facts of each case.
If you signed a non-compete with your employer, check how your state handles non-competes before you plan your startup.
Table 1: How selected states treat non-competes and non-solicits (as of November 2026)
State | Non-competes | Non-solicits and related rules | Source |
California | Virtually all employee non-competes are void. Employers may not enter into or try to enforce them, and employees can sue, regardless of where or when the agreement was signed. | California also limits invention-assignment clauses for inventions developed on your own time without employer resources, with exceptions (Labor Code §2870). | |
Illinois | Non-competes are barred for employees earning $75,000 a year or less ($80,000 starting January 1, 2027). | Customer and employee non-solicits are barred for employees earning $45,000 a year or less ($47,500 starting January 1, 2027). | Illinois Freedom to Work Act (820 ILCS 90), as amended in 2022 |
Minnesota | Non-competes signed on or after July 1, 2023 are void, with limited exceptions such as the sale of a business. | Non-solicitation and confidentiality agreements are not covered by the ban. | |
New York | No statute bans non-competes. Courts decide enforceability case by case. A 2026 bill passed the state Senate but stalled in the Assembly. | New York limits invention-assignment clauses for work done on your own time (Labor Law §203-f). | |
Washington | Starting June 30, 2027, nearly all non-competes are banned, including agreements already signed. | From the same date, customer non-solicits are limited to customers and prospects you developed a direct relationship with through your work, for up to 18 months after you leave. |
General information, not legal advice. State laws may change, and whether a particular agreement is enforceable depends on its terms and the facts.
Can you bring clients or coworkers with you?
If you are launching your own business, do not assume that you can bring important clients and rockstar colleagues with you. If you signed a document with your employer that includes non-solicit language relating to customers and employees of the company, it’s essential that you review and understand the limits of what you agreed to, including specific timeframes for these non-solicits. If you’re co-founding a company with a colleague with a shared employer, review your own unique employer documents as they may be different.
As a general matter, it is very common for employer documents to contain customer and employee non-solicits, and these non-solicits are often enforced even in some states that restrict non-competes. California is a notable exception: its courts generally treat customer and employee non-solicits as void too. Again, rules vary from state to state. For example, starting in June 2027, Washington state will limit customer non-solicits to clients you directly served, instead of any client of the employer, for up to 18 months.
Can you work on your startup while you’re still employed?
As you would expect, the general rule of thumb for working on your own business is that you should do so on your own time and using your own equipment and resources, as employment law generally holds that employees owe a duty of loyalty to their employer while employed. Keep any work on your own business separate from work with your employer, and use your personal devices, accounts, and time.
Again, in nearly every state, the general rule is that you may prepare to launch a business while still employed, for example by forming an entity, writing a business plan, or lining up financing. What you may not do is actually compete with your employer, solicit its customers or coworkers, or use its confidential information before you leave. Officers and senior executives owe heightened duties and may face additional limits. Your employment agreement or company policies can also restrict outside business activities more broadly, even for a business that doesn’t compete..
As part of your planning before you get started on your new business, check your employer documents and your company’s employee handbook for language relating to outside activities and conflicts of interest. You may be required to disclose any such activities.
What shouldn’t you take when you leave?
When you leave your current employer to start your own business, you have responsibilities to leave behind anything covered by confidentiality obligations and trade secret law (both federal Defend Trade Secrets Act and state law). Even in states that ban non-competes, you are obligated to maintain confidentiality and preserve trade secrets after you resign. It is worth confirming that you do not have customer lists, code, pricing, decks, or any confidential documents downloaded to personal drives. Return any company property.
Before you sign any exit certifications, review them to ensure that you have met all requirements.
What will you leave on the table?
If you are ready to leave a job with a paycheck to start a business of your own, you have an appetite for risk, but it’s important to understand how much money you may be leaving on the table in addition to that paycheck:
Equity: Unvested awards usually stop vesting at departure; check the cliff and next vesting date. To keep incentive stock option tax treatment, options generally must be exercised within three months of leaving (26 U.S.C. §422(a)(2)). Find your plan document and check the window.
Bonuses and commissions: Plans often require you to be employed on the payout date in order to receive payment, but these rules vary by state, so check the local rules.
Repayment clauses: Check whether your employer documents require you to pay back any signing bonuses, relocation allowances, or training “stay or pay” costs.
Health coverage: COBRA usually allows you to stay on your employer’s healthcare plan for up to 18 months after you resign and you have at least 60 days to elect coverage.
Before you resign: a 10-point checklist
Gather every employer document you signed, including your offer letter, employment agreement, equity grants and plan, bonus plan, employee handbook
Read PIIAA language, checking the invention-assignment definition and prior-inventions list
Check whether you have a non-compete and how your state handles non-competes
Check customer and employee non-solicits and their length
Keep the startup off company time, devices, and accounts
Don’t take your employer’s files, lists, code or other confidential information.
Map your next vesting date, exercise window, and bonus payout date.
Look for repayment or clawback clauses.
Plan health coverage (COBRA or Marketplace)
Check your notice period, then plan what you’ll say on the way out and on LinkedIn
With employment law checks in place, go all in
If you are one of the brave businesspeople who decides to take the step of founding a company, be sure you’ve done your employment law homework before you make the leap: check your employer documents to ensure that the documents you signed when you took your current job won’t limit your idea and client relationships, who you can hire, and how much money you will leave on the table.
Employer documents can be dense and written in legalese, so you may want additional perspective. FairPlay Law, the AI-native employment law firm I co-founded, works alongside FairPlay Analytics, a tool from our affiliated technology company, FairPlay Global, Inc. Individual professionals and founders can upload their employer documents to FairPlay Analytics and receive a free report that identifies key passages and compares them to norms for their sector. FairPlay Analytics is not a law firm, its reports are not legal advice, and using it does not create an attorney-client relationship with FairPlay Law. If you’d like legal advice about your situation, you can request a consultation with a FairPlay Law attorney.
The best time to understand your obligations is before you resign, not after a cease-and-desist letter from a former employer or a diligence question from a potential investor. Good planning may also give you leverage to negotiate. Employers have many motivations to negotiate terms when employees separate.
FAQs
Can my employer own an idea I developed on my own time?
It depends on what you signed and on your state’s law. Many invention-assignment agreements give employers rights to inventions created during employment. Some states, including California and New York, limit those clauses: an employer generally can’t claim an invention you developed entirely on your own time, without its equipment, supplies, facilities, or trade secrets, unless it relates to the employer’s business or results from your work there.
Can I start a business while I’m still employed?
Often, yes, but with limits. The general rule is that you can prepare to start a business while employed, but you can’t compete with your employer, solicit its customers or coworkers, or use its resources or confidential information. Your employment agreement or handbook may go further, prohibiting outside business activities or requiring you to disclose them, so check those documents first.
Does a non-compete apply if I start my own company instead of joining a competitor?
Generally, non-compete language relates to starting your own company as well as joining an existing competitor. However, rules around non-competes vary by state. Check your employer documents and rules for your state.
What happens to my stock options if I quit to start a company?
Unvested awards usually stop vesting at departure. If you’re planning a departure, check the next vesting date.
Attorney Advertising. This article provides general information only and is not legal advice. Reading it does not create an attorney-client relationship. Laws vary by state and change frequently; consult a lawyer licensed in your state about your situation.
Sources
Illinois Freedom to Work Act, 820 ILCS 90
About the author:
Sanjay S. Kamlani is a co-founder and partner of FairPlay Law, PLLC. He has spent more than 30 years building businesses where law, technology, and global operations meet, and he brings to the firm both that operating experience and a career of business matters including employment negotiations and disputes handled on behalf major corporations and private equity backed businesses.