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We have non-competition clauses in shareholder agreement which prevents any shareholder to own shares in a company which is a competitor. We founding partners think this is a good idea to prevent any important information flowing to competing companies but one of the shareholders who is not a founding partner wants to be able to invest in companies that may compete.

The reason is this shareholder has a portfolio of startup investments and may add more those in the future. Should we founding partners be worried if we allow that possibility? Is it typical that one investor can invest in competing start-up companies?

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I have never heard of a "non-competition" agreement for shareholders. You can sign them up for NDA, but why would you limit their investment options? It is quite common that investors invest in more than one company, and checking who competes with who might be a burden not worth dealing with. If they need to drop someone, it will probably be you, not the other options, as you're the ones causing the problem.

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You aren't concerned about potential conflicts of interest? If they're only putting in money (no review, advice, board seat), that's one thing.. but anything deeper would give the investor privileged/inside information. – CaseySoftware Jan 22 at 5:53
This investor is active, has significant board presence, access to business plan and inside information (but not the source code of any software). We fear they may utilize all this info in some of their other investments that would harm our own business. – user23570 Jan 22 at 6:03
@user23570 maybe you shouldn't get involved with an investor you don't trust then? – littleadv Jan 22 at 6:18
@CaseySoftware what benefit the limitation of investment options gives you? Mere investment means nothing, many VC's are invested in many, often competing, startups. The problem occurs when the information flows from one to the other, and that's what NDA's are for. – littleadv Jan 22 at 6:19

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