Does Washington’s law against non-compete agreements apply to stockholders?

Non-compete agreements between employers and employees are prohibited in Washington except under certain earning thresholds.  These thresholds are established in RCW 49.62.020 (for employees) and RCW 49.62.030 (for independent contractors).

• Employees – must earn more than $100,000
• Contractors – must earn more than $250,000

However, unlike in other jurisdictions that have prohibited non-compete agreements more broadly (California), Washington law permits non-compete agreements when related to purchasing or divesting an ownership interest.  RCW 49.62 clarifies:

A “noncompetition covenant” does not include: (a) A nonsolicitation agreement; (b) a confidentiality agreement; (c) a covenant prohibiting use or disclosure of trade secrets or inventions; (d) a covenant entered into by a person purchasing or selling the goodwill of a business or otherwise acquiring or disposing of an ownership interest; or (e) a covenant entered into by a franchisee when the franchise sale complies with RCW 19.100.020(1).

This means that when you create your startup, you and your co-founders can be asked to agree to a non-compete.  You may also be asked to sign a non-compete by your former partners when selling your share in a business.  A number of “do it yourself” forms online are based on California law and won’t include this language.  It’s a good reason to ensure you engage with legal counsel when structuring your business.

You can learn more about our startup formation packages here.