Investor Demands for Broad Restrictive Covenants, What California Founders Can Do

Investors often demand broad restrictive covenants that California founders face routinely at the term-sheet stage. Yet many of these asks collide directly with California’s uniquely protective public policy on employee and founder mobility. The headline rule is simple: in California, noncompete agreements are generally void as a matter of statute, which means much of what investors reflexively request will not survive scrutiny in a California court. That does not mean founders can ignore the requests. Investors have legitimate goals and there are enforceable ways to protect trade secrets, customer relationships and intellectual property. This guide walks through what is enforceable, what is not, and how to negotiate. Sample scripts, redlined clauses and a decision framework appear below.

TL;DR for founders

When investor demands broad restrictive covenants, California law will often narrow or void them. A blanket noncompete preventing you from starting or joining another company is generally unenforceable under California Business and Professions Code section 16600. Non-solicitation clauses aimed at customers are disfavored; non-solicitation of employees is on shaky ground; and only confidentiality obligations properly tied to genuine trade secrets are reliably enforceable.

What you can realistically negotiate: a narrowly drawn confidentiality obligation anchored to trade-secret law, a clean IP-assignment clause with sensible carveouts for personal projects, and, where an investor insists on post-employment restraint, a paid garden-leave or consulting arrangement rather than an unpaid noncompete. The practical work is trading unenforceable demands for enforceable, mutually acceptable protections. Consult qualified California corporate counsel before signing, and use the scripts below as a starting point.

Why investors ask for broad restrictive covenants

To negotiate well, understand the investor’s underlying goals rather than reacting to the clause wording. Investors are protecting the value of the asset they are buying into, and restrictive covenants are their instinctive tool for doing so. When an investor demands broad restrictive covenants, California enforceability is often an afterthought. The language frequently arrives from a template drafted for a different state.

Investors typically pursue five aims:

• Protecting exit value. A founder who leaves and competes can strip value from the company just before a sale or IPO. Investors want assurance the founder’s human capital stays committed.
• Preventing founder-driven competition. The most acute risk is the founder who departs, recruits the team and launches a rival using the same playbook.
• Protecting intellectual property. Investors want certainty that the code, designs and inventions built during the venture belong to the company, not to the founder personally.
• Preserving customer relationships. Early-stage revenue often depends on relationships the founder personally owns; investors want those relationships locked to the company.
• Retaining institutional knowledge. Post-termination consulting obligations are meant to smooth transitions and preserve know-how.

Common term-sheet asks therefore include a noncompete, a customer and employee non-solicit, broad confidentiality, assignment of inventions and post-termination consulting. Investor bargaining power is real, particularly in competitive rounds where the founder needs the capital more than any single investor needs the deal. But leverage cuts both ways: an investor who insists on unenforceable California covenants signals either inexperience or a template problem, and a founder who can explain the law calmly usually earns credibility rather than losing the round.

California law, what is and is not enforceable

California’s approach to restraints on trade is among the most employee- and founder-protective in the country. Understanding the statutory and case-law framework lets you respond to overreaching investor demands for broad restrictive covenants in California with authority rather than guesswork.

Business and Professions Code section 16600

The foundational statute is California Business and Professions Code section 16600, which provides that, except as statutorily provided, every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind is to that extent void. In plain English: California voids contractual restraints on a person’s ability to work or compete. The rule reflects a deliberate policy choice favoring open competition and employee mobility over an employer’s or investor’s interest in restraint. Unlike many states, California does not apply a “reasonableness” balancing test to save an overbroad noncompete. The default is voidness, not narrowing. Legislation effective January 1, 2024 (including new sections 16600. 1 and 16600.5) reinforced this policy made clear that noncompetes are void regardless of where and when the contract was signed, prohibited employers from entering into or attempting to enforce void noncompetes, and created a private right of action for affected individuals. That framework reshapes almost every founder negotiation.

Edwards v. Arthur Andersen LLP

The California Supreme Court confirmed the broad reach of section 16600 in Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008). In that case the Court struck down a noncompetition agreement and rejected the argument that California recognizes a “narrow restraint” exception permitting limited restrictions. The Court read section 16600 as broadly prohibiting restraints on the practice of a profession, business or trade, meaning that even partial or modest noncompetes are generally void. Edwards is the case founders and counsel cite when an investor insists a “reasonable” or “limited” noncompete should be acceptable in California. It is the controlling authority establishing that the statute means what it says.

Trade secrets and confidentiality

Where genuine confidentiality can be protected is through trade-secret law rather than a noncompete. The California Uniform Trade Secrets Act, Civil Code section 3426 et seq. , protects information that derives independent economic value from not being generally known and that is the subject of reasonable efforts to maintain secrecy. At the federal level, the Defend Trade Secrets Act, 18 U. S. C. section 1836, provides a federal civil cause of action and remedies, including injunctive relief and damages, for trade-secret misappropriation. A confidentiality clause tied precisely to trade secrets can be enforced and can last as long as the information remains a trade secret. A confidentiality clause that sweeps in ordinary skills and general industry knowledge risks being treated as a disguised noncompete and struck down.

Employee invention assignment and carveouts

Investors are entitled to insist that inventions made using company resources and within the scope of company business are assigned to the company, and such assignment clauses are generally enforceable. California Labor Code section 2870, however, limits how far assignment can reach: it generally protects inventions a founder develops entirely on their own time without using the employer’s equipment, supplies, facilities or trade-secret information, provided the invention does not relate to the employer’s business or result from work performed for the employer. Negotiate an explicit carveout for pre-existing IP and genuine personal side projects so the assignment clause protects the company without capturing everything the founder ever creates.

Exceptions and the sale-of-business context

The most important exception to the general prohibition arises in the sale-of-business context. California statutes (Business and Professions Code sections 16601–16602. 5) permit reasonable noncompetes where a person sells the goodwill of a business or an ownership interest, or in connection with the dissolution of a partnership or LLC, so that a buyer can protect the value of what it purchased. A founder who sells their equity in an acquisition may lawfully be bound by a noncompete tied to that sale. This distinction matters: an investor’s ordinary financing round does not fit the sale-of-business exception, but an exit or secondary sale might.

When an investor demands broad restrictive covenants, California founders should ask whether the demand is a financing restraint (generally void) or a sale-of-business restraint (potentially enforceable).

Practical enforceability and litigation risk, a reality check

Knowing a covenant is likely void is not the same as knowing what happens in practice. Enforcement risk is a spectrum, and founders should assess it clearly rather than assume either invulnerability or exposure.

For a blanket noncompete, the practical enforcement likelihood in California is low. A company or investor seeking to enforce one faces the strong headwind of section 16600 and Edwards, and California courts have shown little appetite for saving overbroad restraints. Under the 2024 amendments, an employer that attempts to enforce a void noncompete may itself face liability. That said, litigation is expensive and disruptive even when you ultimately win, and the mere threat of an injunction can chill a founder’s next venture or spook new investors.

Non-solicitation clauses sit in a more contested zone. Customer non-solicits are disfavored in California and can be treated as restraints on trade. Employee non-solicits have historically been litigated with mixed and increasingly skeptical results, particularly since the 2018 AMN Healthcare v. Aya Healthcare decision cast doubt on their enforceability. NDAs tied to trade secrets are the most reliably enforceable, and misappropriation claims under CUTSA and the DTSA can support injunctive relief and damages where a real trade secret has been taken.

Typical plaintiffs are the company itself or an investor exercising contractual rights. Typical remedies split between injunctive relief, the more feared outcome, because it can stop a founder from operating, and monetary damages. The tactical reality: even where the covenant is likely void, a well-capitalized investor can impose real cost through litigation. That is why the goal is not merely to sign an unenforceable clause and rely on invalidating it later, but to negotiate language that is defensible, narrow and unlikely to trigger a fight in the first place.

Negotiation alternatives founders should seek when an investor demands broad restrictive covenants in California

The productive move is to replace unenforceable asks with enforceable protections that satisfy the investor’s real goals. Below are the core alternatives, followed by a comparison table and sample redlined clauses.

Overview of alternatives

• Garden leave. Rather than an unpaid noncompete, offer a paid transition period during which the founder remains employed (or on contract) and is compensated. Because it is paid and consensual, garden leave is more defensible than a naked restraint, but watch wage and payroll obligations, and note that its enforceability against a founder who wants to leave immediately is not settled in California.
• Narrow customer non-solicit. If any non-solicit is agreed, tie it tightly to specific customer relationships the company owns, limit the duration and avoid broad “any customer” language. Even then, treat customer non-solicits as high-risk in California.
• Confidentiality anchored to trade secrets. Define confidential information by reference to CUTSA-style trade secrets, exclude general skill and knowledge, and make the obligation last only as long as the information remains a trade secret.
• IP assignment with carveouts. Assign company-scope inventions while carving out pre-existing IP and bona fide personal projects developed without company resources, consistent with Labor Code Section 2870.
• Compensation safeguards. Where the investor wants post-termination cooperation or consulting, insist it be paid at a fair rate rather than an uncompensated obligation.

Useful rules of thumb: confidentiality can be indefinite only where genuinely tied to trade secrets; a non-solicit, if agreed at all, is more defensible when narrowly tied to specific customer relationships and limited in duration; and any post-termination obligation should be paid.

Sample redlined clauses

Illustrative only, not legal advice. Have California counsel review before use.

Confidentiality, investor template (for illustration only):

“Founder shall not, at any time, disclose or use any information relating to the Company, its business, customers or affairs.”

Explanatory note: This is dangerously broad. By covering “any information” including general skill and knowledge, it risks being treated as a disguised restraint and struck down.

Confidentiality, compromise:

“Founder shall protect the Company’s Confidential Information, meaning non-public information having commercial value, for a period of [3] years, excluding information that becomes public through no fault of Founder.”

Explanatory note: Better, but a fixed term can undercut trade-secret protection and the definition is still broad.

Confidentiality, founder-friendly (recommended):

“Founder shall not misappropriate the Company’s Trade Secrets, as defined under the California Uniform Trade Secrets Act, for so long as such information qualifies as a Trade Secret. This clause does not restrict Founder’s general skill, knowledge or experience.”

Explanatory note: Anchored to CUTSA, this protects real trade secrets, lasts as long as they remain secret, and expressly preserves the founder’s mobility.

Non-solicit, investor template (for illustration only):

“For [24] months after departure, Founder shall not solicit or do business with any customer of the Company.”

Explanatory note: A broad, long customer non-solicit could be treated as an unlawful restraint in California.

Non-solicit, compromise:

“For [12] months, Founder shall not use Company Trade Secrets to solicit customers with whom Founder had material contact during the [12] months before departure.”

Explanatory note: Tying the restriction to trade-secret misuse and specific contact narrows the exposure, though customer non-solicits remain high-risk.

Garden leave, founder-friendly (recommended):

“During any notice period of up to [3] months, Founder shall remain employed and receive full base salary and benefits, and may be relieved of duties at the Company’s discretion.”

Explanatory note: A paid, consensual garden-leave clause is more defensible than a naked restraint and can satisfy the investor’s transition concern. Confirm wage and payroll treatment.

Negotiation scripts and tactical checklist

Concrete language helps founders hold the line without souring the relationship. Adapt these scripts to your voice and circumstances.

• Investor demands a blanket noncompete. “We’re aligned on protecting the company. Under California law a general noncompete is void, so signing one gives you no real protection, and California law now exposes a party that tries to enforce one. Let’s use a confidentiality clause tied to trade secrets and a paid garden-leave period instead.”
• Investor insists on lifetime confidentiality of everything. “I’m happy to protect real trade secrets for as long as they stay secret. A clause covering all information forever risks being treated as a disguised noncompete and struck down, which helps no one. Let’s define confidential information by the CUTSA trade-secret standard.”
• Investor seeks assignment of all future inventions. “Company-scope inventions should absolutely belong to the company, and I’ll sign that. I need a standard Labor Code section 2870 carveout for pre-existing IP and personal projects built on my own time without company resources. Can we add that language?”
• Investor demands unpaid post-termination consulting. “I want a smooth transition and I’m glad to consult. It needs to be paid at a fair rate with capped hours, an uncompensated open-ended obligation isn’t workable and reads like a restraint.”
• Investor asks for a lockup on future startups. “A restriction on what companies I can start in the future is a noncompete, and those are void in California. If your concern is our trade secrets, the confidentiality clause already covers it.”
• Investor points to a term-sheet template from another state. “That template looks like it was drafted for a state that enforces noncompetes. California doesn’t. Let me send back a California-compliant version that gives you enforceable protection.”

Tactical checklist:

1. Must-fix items: strike blanket noncompetes; narrow confidentiality to trade secrets; add IP carveouts; ensure any post-termination obligation is paid.
2. Acceptable concessions: reasonable IP assignment for company-scope work; short paid garden leave; a narrow, short customer non-solicit if unavoidable.
3. Escalation plan: route disputed clauses to corporate counsel, coordinate with cofounders on unified positions, and identify your walk-away threshold before negotiations begin.

When to accept, when to push back, and the tradeoffs

Not every fight is worth having, and not every concession is safe. Weigh these factors when an investor demands broad restrictive covenants in California. You must decide whether to sign or resist:

• Size and competitiveness of the round. In a hot round with multiple term sheets, you have leverage to redline aggressively. In a lifeline round, pick your battles.
• Investor leverage and sophistication. A sophisticated fund usually recognizes that California noncompetes are void and will accept enforceable substitutes readily.
• Your role post-funding. If you’re staying as an operating founder for years, restraint clauses matter less day to day but more at exit.
• IP value. Where the company’s value is concentrated in specific trade secrets, invest your negotiating energy in a tight confidentiality and IP-assignment package.
• Exit horizon. A near-term exit raises the sale-of-business context, where a noncompete tied to the sale may become lawful and appropriate.

As a rule, accept narrow confidentiality plus reasonable IP assignment readily, these are enforceable and legitimate. Resist financing-stage noncompetes as a matter of course, but recognize that a noncompete attached to a genuine sale of your equity is a different animal and may be enforceable. Whatever you accept, document the deal cleanly and negotiate indemnities so you are not personally exposed for good-faith competition after the venture ends.

Implementing enforceable protections after the deal

Once terms are agreed, implementation determines whether the protections actually hold. Take these practical steps:

• Board and corporate records. Reflect agreed covenants in board minutes and the definitive documents, not just the term sheet.
• Consistent HR policies. Use California-compliant confidentiality and invention-assignment agreements for employees and contractors, mirroring the standards agreed with investors and including the required Labor Code section 2870 notice.
• Reasonable secrecy measures. Because trade-secret protection requires reasonable efforts to maintain secrecy, implement access controls, marking practices and document-retention protocols.
• Exit checklists. Maintain offboarding procedures that recover company property and confirm confidentiality obligations at departure.
• Indemnities and escrow. Address indemnification and, where relevant to an exit, escrow arrangements so post-closing covenant disputes have a defined resolution path.

Conclusion and next steps

When an investor demands broad restrictive covenants, California founders hold a stronger legal position than most realize: Section 16600 and Edwards make blanket noncompetes generally void, the 2024 legislation strengthens that position, customer non-solicits are disfavored, and only trade-secret-anchored confidentiality is reliably enforceable. The winning strategy is not to fight over unenforceable clauses but to trade them for enforceable protections that satisfy the investor’s real goals, narrow confidentiality, sensible IP assignment with carveouts, and paid garden leave or consulting instead of unpaid restraints. Use the scripts, redlines and checklist above as your starting framework, then have qualified California corporate counsel review the definitive documents before you sign.

Sources

1. California Business and Professions Code §16600
2. Edwards v. Arthur Andersen LLP, 44 Cal.4th 937 (2008)
3. California Uniform Trade Secrets Act, Civil Code §3426 et seq.
4. Defend Trade Secrets Act, 18 U.S.C. §1836
5. California Labor Code §2870 (employee inventions)
6. State Bar of California
7. U.S. Department of Labor, Wages