Can Founders Have A Side Hustle? The Legal Risks To Consider

Founders tend to have no shortage of ideas.

One idea becomes a business, then another starts taking shape in the background. Perhaps it is a consulting service, a digital product or an entirely new startup. At first, it might be little more than a domain name, a few notes and the occasional late night spent working out whether it has potential.

There is generally nothing stopping a founder from running more than one business. The legal complications usually begin when the new venture crosses into the territory of the business they already have.

The side hustle might target the same customers, use company resources or grow from an opportunity the founder discovered through their existing role. It could also create uncertainty about who owns the idea, the information behind it or the work used to bring it to life.

Before adding another business to your portfolio, it is worth taking a closer look at where the two ventures might overlap.

Can Founders Have A Side Hustle?

For the most part, yes. There is no general rule saying that a founder can only run one business at a time.

However, “founder” is rarely the only role a person holds. You may also be a director, shareholder, employee or contractor of the existing business, and each role can come with different responsibilities.

A shareholder does not automatically have the same obligations as a director simply because they helped establish the company. However, a Shareholders’ Agreement, Founders’ Agreement or investment agreement may still restrict what they can do outside the business.

An employee or contractor may also have agreed to confidentiality, intellectual property, restraint or exclusivity clauses. A director has additional statutory duties relating to how they use their position, information and company resources.

Before beginning another venture, it is worth revisiting the documents connected with your existing role. Depending on how the company was set up, these might include a Founders’ Agreement, Shareholders’ Agreement, employment or executive services contract, company constitution, investment agreement, confidentiality agreement or intellectual property assignment.

These documents may limit competing activities, require you to devote a certain amount of time to the company or say that you need approval before accepting outside work or starting another venture. They may also restrict you from approaching the company’s customers, recruiting its employees or using intellectual property connected with the business.

This does not necessarily mean the new idea is off-limits. It simply means you should understand what you have already agreed to before investing significant time and money in it.

The same applies where the project is still small or has not made any money. The fact that an activity is not profitable does not necessarily make it a hobby. Intention to make a profit, repeated activity, scale and operating in a businesslike way can all be relevant when determining whether an activity is a business.

More importantly for an existing founder, a pre-revenue project can still create conflicts involving company time, information, opportunities and intellectual property.

The more useful question is therefore not whether the project has officially become a business. It is whether it could interfere with the business you already have.

Could The New Venture Conflict With Your Existing Business?

Competition is not always as obvious as two businesses selling the same product.

A side hustle might offer something different but target the same customers. It could rely on the same suppliers, compete for the same partnerships or solve a problem the existing company planned to address later.

There can also be a conflict where the businesses operate in different areas but the founder has agreed to work full-time in the original company. A project that begins as a few hours on the weekend can quickly turn into customer calls, product launches and another team needing attention.

This becomes particularly important when the founder is also a company director.

Directors are expected to act in the company’s best interests, use their powers for proper purposes, disclose relevant personal interests and avoid using their position to obtain an improper personal advantage.

That does not mean a director is banned from having other commercial interests. It means those interests need to be handled carefully where they could conflict with the company.

Imagine that customers repeatedly ask your company for a particular service. The business has not developed it yet, but you can see that there is demand. Rather than raising the opportunity with your co-founders, you launch the service through a separate company and keep the revenue personally.

You might see it as an independent idea that the existing business was not pursuing. Your co-founders or investors may see it as an opportunity identified through the company that should have been offered to the company first.

Sections 182 and 183 of the Corporations Act restrict directors, officers and employees from improperly using their position or company information to gain an advantage for themselves or someone else, or to cause detriment to the company. The obligation concerning improper use of information can continue after someone has left their role.

Whether a particular opportunity can be pursued separately will depend on the circumstances.

It may matter how the idea arose, whether the company was already considering it, how closely it relates to the company’s current or planned activities and whether company information, relationships or resources were used.

A useful test is to imagine explaining the side hustle at the next board meeting. If you would feel uncomfortable describing where the idea came from, who it targets or how it was developed, the potential conflict probably needs to be addressed before you move any further.

Keep The Businesses Separate - Even If They Work Together

When you help build a company from the ground up, it can be easy to think of its resources as your own.

You may have chosen the software, hired the team and personally brought in the first customers. Legally, however, a company is separate from its directors and shareholders. Company property and assets belong to the company, not to the individuals behind it.

That distinction matters when starting something on the side.

Perhaps a company designer makes a quick logo for the new project. A developer spends a quiet afternoon helping with the prototype. The founder uses an existing software subscription, emails a few contacts from the company database or puts an expense on the company card with the intention of sorting it out later.

Each decision may seem minor. Taken together, they can make it difficult to work out where one business ends and the other begins.

The new venture should generally have its own accounts, contracts, records, systems, files and branding. Work on the project should also be kept separate from the existing company’s working hours and team responsibilities.

This does not mean the two businesses can never help one another.

The side hustle may complement the original company. The businesses might refer customers to one another, share technology or collaborate on a new product. The original company might even want to invest in the new venture.

There is nothing inherently wrong with that arrangement, but it should be treated as a genuine commercial relationship rather than an informal exchange between businesses that happen to share a founder.

Suppose the existing company’s team will provide administrative support and product development for the new venture. The parties should decide how that work will be charged, who will supervise it and who will own anything the team creates.

If the company lends money to the new business, it should be clear whether the funding is a loan, an investment or payment for services. If customers will be referred between the businesses, the parties may need to document how referral fees, customer relationships and personal information will be handled.

Where one business uses technology, content or branding owned by the other, an intellectual property licence may be appropriate. A licence can allow another party to use IP on agreed terms without transferring ownership of it.

Depending on the arrangement, the businesses might need a services agreement, loan agreement, referral agreement, IP licence or investment documents.

These agreements can feel overly formal when the same founder is involved on both sides. In reality, that overlap is exactly why documentation matters. It helps show that the arrangement was properly considered and prevents one business from carrying the costs while the other receives most of the value.

Be Clear About Intellectual Property And Confidential Information

Intellectual property is often where a casual side project becomes a serious disagreement.

A founder may begin writing software, developing a product or creating a new brand after hours and assume the work belongs to them. The answer may be less straightforward if the project relates closely to the existing company, was developed under an agreement containing a broad IP assignment or involved company employees and contractors.

IP ownership can depend on the type of IP, the circumstances in which it was created and the relevant contracts.

As a general starting point, employers will commonly own IP employees created in connection with the business. Contractors will generally retain ownership of what they create unless their contract transfers the IP to the client.

This can produce some awkward outcomes.

If an employee from the original company helps develop the new product, their work may belong to their employer rather than the founder or side hustle. If a freelancer is hired without an appropriate IP assignment, the freelancer may continue to own the logo, website content or software the new business relies on.

Problems can also arise where the side hustle builds on technology, templates, designs, content or processes already owned by the existing company. Even if the founder originally created those materials, they may have since transferred ownership to the company under an employment, services or IP assignment agreement.

Written agreements should identify what each business already owns, who will own anything newly created and whether either business has permission to use the other’s IP. Clear agreements are particularly important where employees, contractors or collaborating businesses are creating material together.

Confidential information needs similar care.

Founders often know almost everything about their companies. They may have personally developed the pricing model, built customer relationships and negotiated supplier terms. That does not necessarily mean they can take that information into another venture.

Customer lists, supplier arrangements, product plans, internal processes, financial information and market research may all be confidential. Using them for a side hustle could breach contractual confidentiality obligations and, in some circumstances, a director or officer’s duties relating to company information.

Customer data creates another layer of risk.

Moving a customer list from the existing company to a separately owned venture may amount to disclosing personal information to another entity. Where the Privacy Act applies, the disclosure must be permitted under the Australian Privacy Principles. APP 6 regulates when an APP entity may use or disclose personal information, while APP 7 deals with direct marketing in circumstances not covered by more specific marketing legislation.

Marketing emails and SMS messages also generally need to comply with the Spam Act. Businesses must be able to show that they have consent to send commercial electronic messages, identify the sender and include a working unsubscribe option.

A customer’s agreement to receive updates from one company should not simply be treated as permission to receive marketing from a separate business owned by its founder.

Starting with a fresh customer database may take more work, but it is usually much cleaner than quietly copying the old one across.

Should You Tell Your Co-Founders Or Investors?

Not every weekend project needs a formal board presentation.

However, where the side hustle could compete with the company, use its resources or benefit from an opportunity discovered through it, disclosure may be legally required. It is also often the easiest way to prevent a disagreement later.

A director with a material personal interest in a matter relating to the company’s affairs must generally notify the other directors, although the Corporations Act contains exceptions and the precise process can depend on the circumstances.

Your Founders’ Agreement, Shareholders’ Agreement, company constitution or investment documents may impose additional disclosure and approval requirements.

Even where formal approval is not clearly required, having an open conversation can help everyone agree on where the boundaries sit.

For example, the existing company may be comfortable with the side hustle provided it does not target particular customers, use company employees or operate during agreed working hours. The parties might also confirm that the company will not claim ownership of the project as long as no company IP, confidential information or commercial opportunities are used.

Where approval is needed, it should be obtained through the process set out in the company’s constitution and relevant agreements. A founder should not assume that they can approve the arrangement on the company’s behalf themselves.

The outcome should also be properly recorded. Depending on the company and the nature of the decision, that may involve board minutes, a written resolution, a consent letter or an amendment to an existing agreement.

A vague conversation where someone said the project “sounded interesting” may not be enough if the side hustle later becomes valuable.

Clear written approval can explain what was disclosed, who approved it and what conditions apply. It can also give the founder more confidence to develop the venture without wondering whether a dispute is waiting around the corner.

Getting The Boundaries Right

Founders do not need to stop having ideas just because one of them has already become a business.

A side hustle can be a useful way to explore a different market, diversify income or test an idea that does not fit within the existing company. The problems usually arise when the founder treats the company and their personal venture as though they are interchangeable.

Before launching, review the agreements connected with your current role and consider whether the new venture could compete with the company or take advantage of an opportunity that arose through it.

Think carefully about where the project’s money, information, people and intellectual property are coming from. If there is a genuine conflict, raise it with the appropriate co-founders, directors or investors and document the outcome properly.

Where the businesses will share resources or work together, put a clear commercial arrangement in place.

Founders are free to keep building, but a new idea is not automatically separate simply because it is being developed after hours. Clear boundaries at the beginning are far easier than trying to untangle two businesses after the side hustle has taken off.

A legal expert can review your Founders’ Agreement, Shareholders’ Agreement, employment arrangements or company constitution and help document any approval, IP licence or services arrangement the businesses may need.

If you would like help reviewing your company documents or advice on starting a side hustle as a founder, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.