Keeping Your Business Safe
Greg Botto, President and Founder, Global Network Services
Because my company employed family members, I never dreamed I would need to protect it from internal theft. However, that's just what I had to do when I discovered that four key staff members, who were also family members, were leaving my IT support company and stealing intellectual property to start a rival business.
My story involves an operations manager, a top salesperson, two senior engineers, and the abrupt departure of several clients. When we lost the first major client, I met with the engineer who serviced the account to discuss it. The engineer told me the client hired internal IT staff and no longer needed our services. Soon after, another client working with this engineer left. And then another. In each instance I followed up but did no additional research since sometimes clients do leave for reasons I was offered.
Then suddenly and much to my surprise this engineer resigned. In an exit interview, he said he was leaving the IT field altogether and entering into a new venture with his wife. While his resignation was abrupt, there was no reason to doubt him.
Just days later, a second engineer resignation. Again, I conducted the exit interview, where this individual claimed he was "burned out" and leaving his IT career behind to open an import/export business. The two resignations seemed odd, particularly so close to each other, but I had no reason to be suspicious. While key players in the organization, they were, after all, family.
One day, I stopped by the office of a client who had recently left my business to say hello. To my surprise, I found one of the engineers who resigned from my company working there. I returned to my office and shared what I had seen with my top sales person and operations manager. Neither claimed to have any idea why that prior employee was working for the lost client.
At that point, my instincts took control. I began the process of putting non-compete agreements in place with my existing staff. They stated that if an employee left my company and worked in a similar business, he or she would not solicit my clients for one year. When I presented the document to my remaining employees, all but the operations manager and sales person signed the agreement. They insisted they were "insulted" and it questioned their integrity.
Not long thereafter, I learned that the two engineers who left my company had formed a rival company—utilizing my infrastructure and pricing models. Even worse, they had solicited my customers while they worked for me, eventually diverting 75 percent of my client base to their new entity by promising "continuity" with regard to who supported their business and a discounted hourly rate.
My attorney drafted and sent letters to the two engineers and their new business entity on three instances. No responses were received. Then I filed a lawsuit. While the evidence was overwhelming, these individuals denied vehemently stealing trade secrets and clients. Shortly after the lawsuit was filed, my sales person and operations manager resigned, ensuring me they had no intention of joining their prior co-workers, starting their own company, or working within the IT field.
For a year, we took depositions, even deposing past clients to prove that they had been solicited. We eventually learned that all four individuals were involved with the new business. An economist, who analyzed and determined the value of the stolen clients to be over $2.5 million. Surprisingly, as details surfaced, the four prior employees showed little remorse.
We tried mediation. Their initial settlement offer was for $2,500, while the damages to my company had been determined by the economist to be 1,000 times that amount. They wouldn't budge on their offer. On three different occasions and with three different judges, they worked to have the case thrown out of court on a technicality. Although, in each instance, it was determined that the damages were significant enough to allow my day in court.
We began mediation again, but to no avail. Neither of us would give an inch to the other. In the meantime, I was spending tens of thousands preparing for litigation, since we needed to be prepared for a trial and could not count on reaching a settlement.
Finally, on the day court was to begin, the judge declared a recess and called my attorney and me into his office. He said that while my evidence was strong, it was in my best interest to settle. I could shut my new competitors down, but they would likely declare bankruptcy leaving me with nothing. By settling, I might be able to receive something for the damage done to my company. Mediation began once more, and we agreed on a $350,000 settlement to be paid over three years.
Mine was an expensive lesson. My hope is that the points below, which outline the steps I took following this incident, might help fellow entrepreneurs in protecting their businesses:
Insist that employees sign a non-compete/non-solicitation agreement at the time of hire . Just as important as putting the agreement in place, however, is ensuring it is reviewed regularly with employees. In my company, employees are reminded of the agreement they signed at the time of their annual performance review. Some specific items in the agreement include stealing trade secrets and client lists. Bid and proposal templates developed by my company cannot be utilized either.
Ensure contracts are in place with every client-even if work for that client is intermittent . Once a client relationship is established, it is easy to assume that it will last as long as good service is provided. However, I learned that no matter how strong the relationship, many clients must focus on the bottom line and will be tempted by competitors offering a "better deal." While the agreement I have with clients is not a long one, it does outline terms and conditions regarding terminating the relationship. It also includes language that prohibits clients from soliciting my employees.
The operations manager is a key player with valuable information about your business, so ensure an oversight process is in place. While you want to trust those you hire, do not overlook the importance of ensuring that checks and balances for key staff members are established and utilized.
While my business is in the process of bouncing back from this very painful and expensive ordeal, it has been an uphill battle. In the IT industry, referrals mean everything, and finding new clients takes time. We are now halfway to being where we were before the theft occurred, but I sleep better each night knowing that safeguards are in place to protect my business's most valuable assets.
© 2007 Ewing Marion Kauffman Foundation. All rights reserved.
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