In highly competitive sectors like AI and Web3, where skilled talent is notoriously scarce, retaining top engineers, researchers, and developers is a constant battle for startups.
Founders often grapple with the risk of staff jumping ship to rivals, taking valuable knowledge and networks with them. Non-compete clauses in the form of contractual agreements that restrict ex-employees from joining competitors or starting similar ventures for a set period seem like a logical safeguard.
However, their enforceability varies significantly by jurisdiction, and in places like Malaysia and Singapore, legal hurdles abound. This article explores the legal landscape, and outlines viable alternatives such as non-solicitation agreements, post-employment confidentiality obligations, and IP assignment clauses to protect startup assets when dealing with departing staff.
The recent talent poaching in AI came in several months ago when Meta CEO Mark Zuckerberg aggressively tried to recruit top engineers, offering compensation packages worth up to US$300 million over four years to lure experts from competitors like OpenAI. Reports mentioned that Zuckerberg personally negotiated with candidates, framing these offers as akin to NBA star contracts, complete with massive upfront bonuses and equity.
For other industries like crypto, similar dynamics play out as with blockchain developers frequently headhunted by larger firms like Binance or ConsenSys, where the promise of higher salaries and cutting-edge projects may override loyalty. In such environments, non-competes may theoretically deter defections, but their legal standing often renders them ineffective, forcing founders to seek alternative protections.
Legal position on non-compete and challenges in enforcing non-compete
In Malaysia, non-compete clauses are generally void and unenforceable, classified as restraints of trade under the Contracts Act 1950. Unlike common law jurisdictions that may apply a “reasonableness” test, Malaysian courts have in the past refused to recognise post-employment restrictions outright once deemed a restraint, offering no discretion as they are very tough to enforce. This stems from a strict interpretation that prioritises an individual’s right to work over employer interests, except in limited cases like business sales.
Even in the US, a non-compete clause cannot generally be enforced in the US for most talent staff after the Federal Trade and Commission (FTC)’s Non-Compete Rule becomes effective on 4 September 2024, with the exception of existing non-competes for senior executives, which can remain in force. The rule broadly prohibits new non-competes and invalidates most existing ones, although it is currently facing legal challenges that could impact its implementation.
Also Read: The legal roadmap every Southeast Asian startup needs
As a founder, this means a non-compete barring an ex-employee from joining a rival AI firm for two years is deemed void, even if narrowly tailored. Founders may thus avoid relying on non-competes, as it is unlikely to stand in the court of law.
Singapore presents a more nuanced picture. On the surface, non-compete clauses are prima facie void as restraints of trade but it may be enforceable if the employer can demonstrate that such clause is to protect a legitimate proprietary interest (e.g. such as trade secrets or client relationships) and are reasonable in scope, duration, and geography. In practice, courts will need the employers to prove necessity, with restrictions typically limited to 6-12 months and specific industries.
To illustrate, a non-compete clause restricting a former crypto developer from working on similar blockchain projects for a year may hold if it safeguards confidential algorithms, but overly broad terms (e.g., barring all tech roles) may likely fail.
Top four alternatives to non-compete agreements
Given these limitations, founders may pivot to other alternatives that courts in both Malaysia and Singapore readily uphold.
- Non-solicitation agreement: A non-solicitation restrict ex-employees from poaching clients, colleagues, or partners for a reasonable period, directly protecting relationships without broadly restricting employment. This may prevent a departing researcher from recruiting team members to a rival company.
- Non-disclosure agreement: Post-employment confidentiality obligations, often via non-disclosure agreements (NDAs), bind staff to secrecy on proprietary info like codebases or algorithms indefinitely, enforceable as they target specific assets rather than competition. For crypto firms, this safeguards wallet protocols or smart contract designs.
- Scholarship or training bond: Another option is to utilise scholarship or training bonds as an effective alternative to non-compete clauses to retain skilled staff and protect investments in employee development. These bonds are contractual agreements where employees commit to remain with the company for a specified period (e.g. typically 1-3 years) after receiving fully or partially funded training, certifications, or educational programs, such as AI research courses or blockchain development bootcamps. If the employee leaves before the bond period ends, a clawback provision requires them to repay a prorated portion of the training costs, incentivising retention without restricting future employment. Legally speaking, such bonds may generally be enforceable if reasonable and proportionate in duration and cost, as they do not violate the prohibition on restraints of trade.
- IP assignment agreement: Finally, IP assignment agreements ensure all inventions created during employment belong to the company, clarifying ownership and preventing ex-staff from claiming rights to developed tech. These can include “present assignment” clauses for future IP, crucial in fast-paced Web3 where employees might fork projects post-exit. Tailoring NDAs to be specific and fair enhances enforceability, avoiding the pitfalls of overreach.
Also Read: 5 legal mistakes startups make after inception and how you can avoid them
Final thoughts
In conclusion, while non-competes offer illusory protection in Malaysia and conditional safeguards in Singapore, founders must foster retention through culture, equity incentives, and these legal alternatives.
By emphasising confidentiality and IP assignments, startups may mitigate risks from ex-employees without alienating talent in scarce markets. Proactive drafting in employment contracts, with the assistance of a local counsel, may ensure innovation can thrive amid competition.
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