This post uses hypothetical scenarios for illustrative purposes only. It does not describe any actual client, transaction, or representation, and is not legal advice.
Here is the closing-condition story founders almost never hear before signing the LOI. A founder is in the middle of a sale process that has run a clean nine months. The signing is scheduled for the following Tuesday. On the Thursday before signing, at 7:30 in the morning, the buyer’s counsel circulates a packet of draft restrictive-covenant agreements — not addressed to the founder, whose own non-compete was negotiated to a comfortable resolution six weeks earlier in the merger agreement, but to the head of engineering, the VP of sales, and two senior product managers. The covenants are four years long, geographically unlimited, and prohibit any work in the broader category the company operates in. The buyer’s cover note says the four agreements are a closing condition.
The founder wants to know whether he has to deliver them. He wants to know what happens to his deal if even one of those four employees refuses to sign. He wants to know why he is finding out about this at 7:30 on the Thursday before signing. Those are all good questions.
The answer to the first is nuanced. The answer to the second is that the deal is, at that moment, exposed to four separate veto holders the founder had not realized existed. The answer to the third is that this is how the buyer’s playbook is designed to work — not because the buyer is acting in bad faith, but because the structure of the closing-condition mechanic gives the buyer a quiet leverage point that founders, almost without exception, do not see coming.
The provision is in your merger agreement and you probably already signed it
For related M&A reading on this site, see our posts on The Hell-or-High-Water Antitrust Covenant Has Quietly Gone Asymmetric, The No-Shop Window Is Negotiated Wrong, and Delaware SB 21 and the New Section 144 Safe Harbor.
If you go back to your draft merger agreement and look at the closing conditions section, you will find a paragraph that says, roughly, that as a condition to the buyer’s obligation to close, each “Key Employee” — usually a defined term, usually a schedule attached to the agreement listing five or ten or twenty individuals — must have entered into an employment offer letter and a restrictive-covenant agreement in form and substance satisfactory to the buyer. The provision is, on its face, unobjectionable. The buyer is paying for a business. Part of what the buyer is paying for is the continued availability of the people who make the business work. Reasonable.
What the provision does not say, and what founders consistently miss when they review the agreement, is that the form and substance of the restrictive-covenant agreement is not set in the merger agreement. The form is delivered by the buyer at some point before closing — sometimes weeks before, sometimes days before — and the buyer’s lawyers are the only ones drafting it. The merger agreement gives the buyer the right to demand a covenant that is “reasonable” or “customary” or “satisfactory to the buyer” — language that, in negotiation, looks like a neutral formulation but in practice gives the buyer almost complete control over the substance.
The substance, when it shows up, is almost always longer in duration, broader in geography, and broader in scope of restricted activity than anything the key employees would have voluntarily signed during their employment with the founder. The buyer’s deal team has standards — minimum non-compete terms they apply across portfolio companies, minimum non-solicit terms, customer non-solicit windows, employee non-solicit windows, confidentiality definitions that reach widely into the employee’s general knowledge. Those standards become the form, and the form becomes the closing condition.
Why this is a leverage problem and not just a paperwork problem
The closing condition mechanic is what makes this a leverage problem rather than a paperwork problem. The buyer’s obligation to close depends on the key employees signing the covenants. Which means the key employees — your four senior people, the ones whose names happen to be on the closing-condition schedule — each hold a veto right over your transaction. They did not negotiate for this veto right. They did not pay for it. They almost certainly do not know they have it until the buyer’s covenant packet lands in their inbox three days before closing. But they have it nonetheless, and once they understand they have it, the dynamic of your final closing week changes in ways the founder cannot easily control.
The honest version of what happens next is that some percentage of key employees will read the four-year non-compete, decide that they are not willing to sign it on those terms, and request modifications. The founder is then in the position of either delivering the modifications — which requires going back to the buyer and reopening a term that the buyer presented as non-negotiable — or telling the employee that closing is at risk, which is an unpleasant conversation that puts the employee on notice of their own leverage. Some percentage of key employees, having been put on notice of their leverage, will use it. They will request signing bonuses, equity grants, retention compensation, or modifications to the offer letter. The founder, three days from closing, is the party with the least flexibility in the negotiation.
The buyer is not, in practice, deliberately manufacturing this dynamic. The buyer is simply running its standard closing playbook. But the standard closing playbook has the effect of transferring negotiating leverage from the moment of LOI execution — when the founder had it — to the closing week — when the key employees have it. And whatever value the key employees extract from the founder in that closing week comes out of the founder’s net proceeds.
What founders should have negotiated, and when
The conversation that solves this problem belongs in the LOI or the early-stage merger agreement, not in the closing week. There are three negotiations to run, in increasing order of difficulty.
The first negotiation is to set the substantive terms of the key-employee covenants in the merger agreement itself, not in a buyer-delivered form. The merger agreement should attach the actual form of restrictive-covenant agreement as an exhibit, with the term length, the scope of restricted activity, the geographic scope, the consideration, and the carve-outs all spelled out. This conversion of the substance from “form satisfactory to the buyer” to “the form attached as Exhibit J” is a meaningful drafting change. It forces the parties to negotiate the terms during the period when the founder has leverage — between LOI and signing — rather than during the closing week.
The second negotiation is to scope the closing condition. The buyer will want the closing condition to require all key employees to sign. The founder should push for a quantitative threshold — typically a percentage, often 75 or 80 percent of named key employees. The threshold gives the founder a real cushion. If one or two key employees refuse to sign, the deal still closes. The dynamic where each key employee holds a unilateral veto right disappears.
The third negotiation is the hardest and the most valuable when achievable. The founder should ask for an explicit agreement that the buyer will not require any key employee to sign restrictive covenants more restrictive than the covenants the employee already has in place under existing employment agreements. The buyer will resist. The buyer’s portfolio standards will be the reason given. But where the founder has leverage — competitive process, strong financial performance, attractive asset — this concession is achievable. It is also the cleanest fix, because it eliminates the asymmetry between what the founder signed up for at LOI and what the founder discovers at closing.
The FTC rule and the state patchwork
The other piece of context that founders should understand, because it changes the buyer’s playbook in ways the buyer’s lawyers may not be fully candid about, is the regulatory environment around employee non-competes in 2026. The FTC’s non-compete rule has had a complicated path through the courts, and the state-level response — California, Minnesota, Oklahoma, North Dakota, and a growing list of others — has narrowed the enforceable scope of employee non-competes in many of the jurisdictions where founders and key employees actually live and work.
The practical effect, for closing-week non-compete packets, is that some material fraction of the covenants the buyer is asking key employees to sign would be unenforceable as a matter of state law in the employee’s home jurisdiction. The buyer’s lawyers know this. The buyer’s lawyers ask for the covenants anyway, partly because the in-terrorem effect of an unenforceable covenant still suppresses competitive activity by most employees, and partly because there is a meaningful chance the law shifts before any particular employee tests the covenant.
The founder’s counter, when the closing-week packet arrives, is to push back on substance with reference to applicable state law. A buyer who is asking a Minnesota-resident engineer to sign a four-year non-compete is asking for something that, under Minnesota’s 2023 statute, is not enforceable as a matter of public policy. The buyer’s lawyers, confronted with the specific state-law point, will almost always trim the covenant to something defensible. But the conversation should not be happening in the closing week. It should be happening in the LOI, with the form exhibit attached and the terms locked.
What founders should do this week, if they are mid-process
If you are reading this and you are between LOI and signing, the conversation to have with your counsel today is this: ask for the form of restrictive-covenant agreement to be attached as an exhibit to the merger agreement; ask for a percentage-based closing condition rather than an all-or-nothing condition; and ask whether the buyer will agree to no-more-restrictive terms than each employee already has in place. Each of those three asks is achievable. Each of them shifts the leverage out of the closing week. The founder-side commentary on PE deal documents applies in much the same spirit here — the leverage in any deal is heaviest before signing, and the questions you ask before signing are the questions that determine what the closing week feels like.
If you are reading this and you are already in the closing week with an aggressive covenant packet on the table for your key employees, the conversation is different. It is about identifying the two or three employees who are likely to push back, getting in front of those conversations rather than reacting to them, negotiating the substance of the covenants back toward defensible terms (with reference to applicable state law), and being prepared to fund whatever modest signing bonuses or retention payments the closing dynamic demands. The cost is real but it is finite, and the alternative — a deal that does not close because a senior employee chose not to sign — is worse.
If you are a founder mid-process and a closing-condition restrictive-covenant packet has just landed on your key employees, feel free to reach out to my firm manager, Magda, at Magda@montague.law, or fill out our contact form. Mention you read this post.
