Legal Analysis of Non-Compete Agreements and Consent Waivers | When Moonshot AI's (KIMI) Founder Was Arbitrated by Former Company Shareholders

In today’s internet landscape, both the gaming and AI industries are developing rapidly, leading to an increase in legal disputes arising from technical executives, founders, or core team members changing jobs or starting new ventures.

Recently, according to a report by the public account “暗涌Waves” (Undercurrent Waves), Moonshot AI’s founder Yang Zhilin and co-founder Zhang Yutao, after leaving Recurrent AI (their former company), established a new company (Moonshot AI) without obtaining a consent waiver from the former company’s investors. They are now facing arbitration initiated by some of the former company’s investors at the Hong Kong International Arbitration Centre (HKIAC). Click here for the specific article

What is a consent waiver? How does it relate to non-compete agreements?

This article will analyze the legal framework of non-compete agreements and consent waivers and their application in China, exploring how to legally protect the dual interests of investors and entrepreneurs.

*This article represents the author’s personal opinions and should not be considered as legal advice or opinions.

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I. What is a Non-Compete Agreement?

A non-compete agreement, also known as a non-competition covenant, aims to restrict key employees’ competitive behavior after leaving a company, preventing them from bringing the former company’s trade secrets, core technologies, and customer resources to competing companies. The Labor Contract Law provides detailed provisions on non-competition restrictions. The applicable subjects of non-compete agreements include core company personnel, technical R&D personnel, executives, and other key roles. The term, scope, and compensation standards of non-compete agreements must be reasonable; otherwise, they may be deemed invalid.

Article 24: Persons subject to non-competition restrictions are limited to senior management, senior technical personnel, and other persons with confidentiality obligations of the employer. The scope, geographical area, and term of non-competition restrictions shall be agreed upon by the employer and the worker; the agreement on non-competition restrictions shall not violate laws and regulations.

After the rescission or termination of the labor contract, the non-competition period for the persons specified in the preceding paragraph to work for other employers that produce or operate the same type of products or engage in the same type of business as the original employer, or to start their own business producing or operating the same type of products or engaging in the same type of business, shall not exceed two years.

II. What is a Consent Waiver?

Non-competition agreements require departing employees to refrain from engaging in similar competitive business for a certain period. However, in the entrepreneurial environment, especially in technology-intensive industries, founders often have the ability and need to continue technology development and business expansion after leaving. For former investors, allowing entrepreneurs to start new projects must be within the legal framework and must protect the former company’s rights. Therefore, the consent waiver came into being.

A consent waiver is a special document used to release or waive the restrictions of a non-compete agreement. Its main purpose is to release founders or core team members from non-competition restrictions with the consent of the original investors or company shareholders, allowing them to continue their entrepreneurial endeavors in new projects or companies.

Consent waivers are typically based on the “Investment Agreement” signed between the founding team and investors. Investment agreements often include “non-compete” clauses that constrain the invested team from “personnel departures” or “secondary entrepreneurship.” Essentially, it is a guarantee mechanism for investors’ and shareholders’ interests. While preventing non-compete agreements from directly hindering entrepreneurs’ new developments, it can also protect original investors’ interests through methods such as “secondary investment agreements.” Consent waivers can also include additional clauses, such as restricting specific markets or stipulating transfer of proceeds, to more flexibly adjust the relationship with the entrepreneur. They can relax non-competition restrictions within a certain scope and clearly define the competitive boundaries between the new company and the former company in conditional waivers.

III. Practical Application of Non-Compete Agreements and Consent Waivers

In the domestic internet industry, especially in technology-intensive enterprises such as gaming and AI, non-compete agreements and consent waivers have become core tools for corporate legal risk management. Particularly in the tripartite relationship among founders, technical executives, and investors, the arrangement of non-competition restrictions is particularly important.

The application of non-compete agreements and consent waivers in practice generally includes the following key points:

Application of Non-Compete Agreements in Investment Agreements

Non-compete agreements were initially primarily applied in labor contracts between companies and executives or technical personnel as an important barrier against trade secret leakage and unfair competition. As the investment and financing environment becomes increasingly complex, non-competition clauses have become standard provisions in investment agreements, with their scope extended to founding teams and core technical personnel.

Based on investment agreements I have previously handled, these clauses often include restrictions on the departure timing of core personnel (original shareholders and core employees), post-departure non-competition restrictions (including employment and entrepreneurship), and a series of competitive behaviors. They also often detail the geographical scope of non-competition, business fields, and the scope of potential competitors to maximize company interest protection.

Legal Confirmation and Prior Agreement of Consent Waivers

However, in the highly talent-concentrated internet industry, the demand for secondary entrepreneurship among technical talent is increasing. In the gaming industry, it is not uncommon for core teams to leave and start new ventures, or even for original shareholders to start new businesses. In such cases, consent waivers can effectively prevent non-compete agreements from excessively hindering the founding team’s re-entrepreneurship while protecting the original investors’ interests.

In practice, when founding teams, executives, and core members are preparing for secondary or departure entrepreneurship, they will negotiate and sign consent waivers with investors to ensure that non-competition restrictions are legally released or relaxed, and to reasonably define the scope of re-entrepreneurship activities under waiver conditions.

Consent waivers are typically confirmed through a vote at the company’s shareholder meeting or signed by investor shareholders as a waiver agreement for a specific individual. Additionally, many consent waivers include special clauses, such as stipulating the market scope, geographical area, target customers, or business model of the re-entrepreneurship, to ensure that the new company does not directly compete with the former company.

Business Conflict Management and Agreement Preset After Re-Entrepreneurship

In practice, non-compete agreements and consent waivers often need to be combined with preset measures based on the specific risks of the company’s business nature. For industries where potential conflicts may arise, companies typically standardize the competitive relationship between the new and former companies by detailing waiver conditions and business boundaries.

For gaming companies, non-compete agreements may restrict gaming-related activities, such as prohibiting employees from working for other gaming companies within the agreed period, prohibiting them from engaging in work identical or similar to their original job duties, prohibiting them from providing game design or technical consulting services to competitors, and some more stringent agreements may also restrict involvement in the same game genre development (such as MMORPG, card games, etc.), similar core gameplay design, and prohibit the use of the original company’s user data, marketing channels, and other commercial resources.

Consent waivers can specifically relax these restrictions, for example, allowing the development of different game genres or conducting business for different target user groups or different business models. Waivers typically clearly define elements such as the game genres, target market positioning, and operational models that can be pursued, and define potential competitive behaviors. For example, they might stipulate that the new company mainly focuses on casual games while the former company focuses on hardcore games, or that they will not directly compete in specific regional markets (Mainland China / Hong Kong, Macau, Taiwan / Southeast Asia / Europe & US / Japan, etc.). At the same time, waivers may also include authorization clauses for using original technology and art resources, as well as specific agreements on marketing, user acquisition, etc.

IV. Legal Protection Strategies for Founders (Core Personnel) and Investor Shareholders

Suggestions for Founders and Core Personnel

1. Understand and Reasonably Set Non-Compete Clauses in Advance

For core personnel or founders, at key career development stages, having a thorough understanding of non-compete agreement clauses can provide legal protection for future career development.

When signing agreements, focus on the reasonableness of non-competition restrictions, including core elements such as the competitive scope, time period, geographical restrictions, and economic compensation, to avoid excessively restricting professional freedom.

For core team members with a strong entrepreneurial inclination, it is recommended to preset waiver mechanisms in the agreement to leave room for possible future entrepreneurial activities and provide smoother communication channels when waivers are needed in the future.

2. Obtain Written Waiver Consent from Investors Before Re-Entrepreneurship

Core personnel who have already signed non-compete agreements should pay attention to the importance of consent waivers before starting a new venture. Before launching a new project, core personnel should fully negotiate with the former company’s shareholders or investors to obtain clear written waiver consent, avoiding the triggering of non-competition restrictions or liability for breach of contract.

Legally obtaining waiver consent not only provides legal protection for the new entrepreneurial activities but also helps facilitate future financing activities, preventing the new company from encountering capitalization obstacles due to potential legal disputes, or even facing arbitration like Moonshot AI.

Core personnel can proactively discuss with investors before leaving and clearly define the boundaries of future entrepreneurial activities in the waiver to ensure the rights of both parties do not conflict.

3. Reach a Written Consensus on Business Boundaries Between the Old and New Companies

Founders or core personnel should reach a clear consensus with investors on the business boundaries between the old and new companies before starting their new venture.

For example, for a soon-to-be-established new company, it is necessary to focus on whether the new company will compete with the former company in terms of business scope, customer resources, technical direction, etc., and clearly stipulate this in the waiver to avoid potential legal disputes during the entrepreneurial process.

Defining clear business boundaries helps reduce potential conflicts of interest between both parties, allowing the old and new companies to achieve business expansion under a win-win premise.

Suggestions for Investor Shareholders

1. Reasonably Plan Non-Compete Agreements and Waiver Clauses to Ensure Balance of Rights and Risks

For investor shareholders, it is important to scientifically design non-compete agreements during investment, especially focusing on reasonable restrictions on the competitive behavior of founders and core technical teams.

Agreement clauses should appropriately cover elements such as the duration, scope, and geographical area of non-competition, with reasonable compensation mechanisms to enhance legal enforceability, avoiding partial or total invalidity due to violation of mandatory legal provisions.

Additionally, if considering the possibility of founders starting new ventures in the future, waiver conditions can be preset in the non-compete agreement, clearly defining the waiver mechanism to avoid unnecessary disputes between both parties over waiver rights.

2. Strengthen Communication Mechanisms to Avoid Shareholder Disagreements Affecting New Company Development

In the multi-shareholder context of high-tech enterprises, investor shareholders should establish adequate communication mechanisms when core personnel engage in re-entrepreneurship, ensuring that consent waivers are not shelved due to shareholder disagreements (in the Moonshot AI incident, there was precisely a problem of inconsistent opinions among shareholders).

For example, if a re-entering founder applies for a waiver, consensus on waiver conditions can be reached through shareholder meetings, third-party mediation, etc., setting reasonable boundaries for the founder’s new project, supporting entrepreneurial activities while protecting the commercial interests of the original investment project.

Good communication mechanisms can not only balance the demands of all parties but also avoid affecting the normal development of new projects due to shareholder disagreements.

3. Preset Commercial Protection Clauses in Waiver Agreements to Reduce Competition Risk

For investor shareholders who allow core personnel or founders to start new ventures, appropriate protection clauses can be included in the consent waiver, such as limiting specific market access, restricting business types and expansion directions, etc.

The application of such clauses in waiver agreements can provide additional commercial protection for investors, ensuring that the new company’s development does not seriously affect the former company’s market position or customer resources.

Additionally, compensation mechanisms can be further agreed upon if the re-entrepreneurial behavior causes damage to the former company’s commercial interests, ensuring the waiver consent is both reasonable and legal while facilitating the protection of investor interests.

Developing Differentiated Protection Strategies Based on Gaming Industry Characteristics

When designing waiver agreements for the gaming industry, investors should fully consider industry characteristics and can consider differentiated protection from the following dimensions:

First, clearly define the classification standards for different game types, gameplay, categories, themes, etc. in the agreement to avoid gray areas and ensure no obvious direct competition between the old and new companies.

Second, clearly define the use of core technology and art resources, especially usage rights for basic technologies such as proprietary engines, framework code, and common components, ensuring the former company still has sufficient technical advantages for a certain period while preventing job-related works from being appropriated.

Third, set reasonable restrictions on user data and channel resources, such as stipulating that the new company may not use the original distribution channels or user resources within a specific period to avoid unfair competition.

Additionally, restrictive agreements can be made regarding the R&D, launch timing, and launch regions of specific game types, reserving sufficient market opportunity windows for the former company.

V. Conclusion

Non-compete agreements and consent waivers have become key legal tools in high-tech enterprises, especially in the internet industry to which gaming belongs, for balancing shareholder rights protection and founders’ entrepreneurial freedom.

In practice, enterprises should operate with precision in contract management and risk control in accordance with relevant legal provisions. By reasonably setting non-compete agreements and flexibly using consent waivers, enterprises can not only protect core interests but also leave legal space for founders’ re-entrepreneurship, minimizing future legal disputes and operational risks.