This is Part Two of a five-part series: Joy of Honesty in Business.

It’s always been popular to work on new projects while still employed, but the current global recession makes this idea even more attractive.  There’s plenty of good advice out there about how to do this, but the lists I’ve seen have left out something critical:

Tell your employer what you’re doing.

You might think security by obscurity is wise, but in my experience being proactively honest is not only easier, it even opens doors.

My first extra-curricular project was FastScheduler, a Web site for students to schedule classes at the University of Texas at Austin. Students would input their needed classes with day and time preferences (important for students who work). FastScheduler would provide a workable schedule based on available class openings.

The best part was that FastScheduler knew which classes were already full and which were available, so the schedules were not only tuned to your preferences but also were possible to get. This was a vast improvement over the maddening telephone-based incumbent system.

FastScheduler was popular — at its acme, more than 15,000 students per semester used the tool to schedule their classes. But none of this would have been possible if it weren’t for my employer, Paul Schmidt, the founder of Photodex.

Paul liked the idea and volunteered Photodex’s servers. Without being honest with Paul, FastScheduler would never have made it past my own computer. This was 1996 when Internet servers and bandwidth were expensive; I could never have afforded to host this project myself.

(Now, if only Paul had noticed that I misspelled “Wendsday.”)

A friend of mine has had even more impressive results with an interesting company called OtherInbox. Josh Baer had already become independently wealthy after selling his company SKYLIST (like Constant Contact before Constant Contact) to Datran Media. After two years as their Chief Technology Officer, Josh decided to pursue a new idea — a system that automatically organizes your e-commerce and newsletter email and scuttles it out of the way — in an “other inbox” — leaving your regular inbox clear for important, timely mail.

Josh could have gone off on his own, possibly in secret. Instead, he approached Datran with a plan: Datran incubates OtherInbox in exchange for stock and for Josh remaining physically in Datran’s offices so they can bother him on occasion even after his official employment contract is over. And it worked — OtherInbox is a hit and the next round of funding is underway.

Employers won’t always be this solicitous, but honesty is still the best policy. Take my current company Smart Bear. My first product was a piece of shareware called Code Historian — nothing more than a curious side-project, certainly not a money-maker.

I conceived of Code Historian just as I was starting work at DataCert. I could have kept Smart Bear a secret, tap-dancing around employment agreement statements like “Employee will expend all efforts in the interest of DataCert and in DataCert’s currently conceived products, designs, marketing efforts, customers, know-how, concepts, improvements, trade secrets, and business plans, as well as any contemplated future products, designs, marketing efforts, customers, know-how, concepts, improvements, trade secrets, and business plans.” (Whatever that means.)

Instead, in a single stroke I removed all worry and interpretation: I simply added an addendum to my employment contract explaining what I was doing with Code Historian, making it clear that it was noncompetitive and done on personal time, and including a sentence stating that this was not contrary to any provision in the employment agreement.

Then, I got DataCert’s lawyer (not some Director of Whatever) to sign the addendum. I still have the original.

In this case, the employer didn’t help me — and usually they won’t — but I can sleep easy knowing that I wasn’t doing anything wrong, and they agreed.

In fact, many other articles on this topic describe how to skirt employment contracts and how to “break the news” as you quit so as not to stir up trouble. But if you’re candid and get it in writing, all that goes away.

Sure, it’s possible they’ll say “no,” but in this case it was a bad idea to overlap anyway. I’ve seen friends sued over such things. Getting sued can ruin your life even if you’re right, even if you’re exonerated. During the lawsuit you’ll be crippled with legal fees and worry. If you lose, you could lose all your savings and plenty of future earnings. Even if you win you don’t get your legal fees back! And you don’t get the time back either.

Doing a startup is enough work and stress without also worrying about being sued by your ex-employer. Better to know up front and avoid that mess. “Not getting sued” trumps “fun new startup.”

So do yourself a favor: Just be honest.

This post originally was published Jan. 20, 2009, on Jason Cohen’s blog, “a smart bear.”  Check there to see comments and more tips from his readers!

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