What would you call your computer, cell phone, your notebook, blue-light glasses, or a pen on your desk? Each of these things are tools. You use them to get work done and, ultimately, make your business successful. In the same way, contracts are tools that help business owners promote the success and protection of their businesses.

Contracts help business owners:

1. Protect their businesses
2. Set expectations
3. Avoid misunderstandings

But not all contracts are the same! Whether you’re working with employees, partners, or vendors, it’s important to know which types of contracts apply—and what each one is designed to do.

In this blog, we’ll explore three common types of business contracts:

• Non-compete agreements
• Non-disclosure agreements (NDAs)
• Partnership agreements

We’ll explain when they are used, why they matter, and what you need to know before signing one.

#1 What is a Non-Compete Contract?

A non-compete agreement is a contract where two people in a business relationship agree not to compete with each other. One common example of this is a non-compete agreement between an employer and an employee where the contract prevents an employee from leaving their job to work for a competitor or to start a similar business.

Key Points to Know:

• Not Always Enforceable: In some situations, these contracts are becoming unenforceable. Some states won’t let employers enforce a non-compete against an employee.
• Non-Solicitation Agreements: A non-compete agreement often includes a non-solicitation agreement. This is an agreement signed by an employee stating that they will not try to poach customers, employees, or vendors from their employer. These clauses are usually enforceable nationwide, except when they create monopolies. For example, while Apple and some of their vendors have signed non-solicitation agreements not to poach employees, the Federal Trade Commission (FTC) has argued that these types of agreements can keep wages low. More on why that is below.

The Problem with Non-Compete Contracts

Non-compete agreements can unfairly limit an employee’s ability to find another job in their field. These agreements may force them to change industries or wait until the agreement expires. Some employers may also disguise non-competes with terms like “education reimbursement,” charging employees for training if they leave.

It’s a good idea to avoid non-compete agreements with employees, as they often create more problems than they solve, and instead think about using a non-disclosure agreement. These keep your business info safe, but don’t limit your employee’s ability to find work after leaving your business. However, non-competes between business owners or partners can be useful.

Current News on Non-Compete Agreements: The FTC is working to ban non-compete agreements between employers and employees, though the rule is currently on hold.

#2 What is a Non-Disclosure Agreement (NDA)?

A non-disclosure agreement (NDA) protects confidential information by legally requiring someone to keep it secret. This is especially important for businesses that want to protect intellectual property (IP) and trade secrets.

When Do You Need an NDA?

Almost every business should use NDAs, especially with employees, contractors, and close business partners.

NDAs protect:

• Trade Secrets: Processes, recipes, checklists, or strategies that give your business a competitive edge.
  Example: A construction company’s bidding checklist could give competitors a huge advantage if leaked. An NDA protects that info.
• Vendor Lists and Pricing: If not protected with an NDA, this information can help others undercut your business.
• Pending Business Transactions: NDAs protect details about buying or selling a business as well as new product launches.
  Example: Apple uses strict NDAs to keep product launches secret. For one product, Apple filed a patent in Jamaica to prevent early discovery.

Why Use an NDA Instead of a Non-Compete?

For most businesses, an NDA is a better way to protect intellectual property than a non-compete agreement. NDAs ensure that employees can’t share business secrets, even after they leave the company, without limiting their career options.

#3 What is a Partnership Agreement?

A partnership agreement sets the rules for how business partners will work together. Without a written agreement, partners may unintentionally form what’s called an accidental partnership, meaning they could be personally responsible for each other’s business debts. You don’t want that to happen!

What Should Be Included in a Partnership Agreement?

1. Clear Roles and Responsibilities: Define who is in charge of what.
2. Ownership of Intellectual Property: Clarify who owns the work created by the partnership.
3. Problem-Solving Process: Include a plan for handling disputes.
4. How Profits and Losses Will Be Shared: Explain how partners will divide money and handle expenses.

How Founder’s Agreements Help Startups

A founders’ agreement is a special type of partnership agreement that’s useful for startups. It covers the same topics as a typical partnership agreement but also includes specifics about equity ownership and how decisions will be made among the founders.

Tip: Even if you plan to form an LLC with your partners, having a partnership agreement in place is a smart way to start working together smoothly.

Conclusion: The Right Contract for the Right Situation

As a business owner, understanding different types of contracts helps you protect your business, avoid misunderstandings, and promote the strength of your business.

Here’s a quick summary:

• Non-compete contracts: Prevents competition, but can limit employee freedom. Better suited for business owners and partners.
• NDAs: Protects private business information and is a better way to protect intellectual property without limiting careers.
• Partnership agreements: Sets rules for working together and avoids accidental partnerships. They are essential for any business collaboration.

Learn more about contracts: Now that you know about a few of the different types of contracts, the next blog will dive into contract terms—the specific rules you need to watch out for in any business contract.

This contract blog is #1 of a six-part series on strengthening your business with contracts. If you want to learn more about business contracts, sign up for the full blog series delivered to your email free.