Say someone mows lawns for a lawn care company they tell the owner they feel like they deserve a raise and if they don't get one they will quit and start their own competing lawn care company. Is that extortion?
A threat to start a competing business is not extortion.
Federal law prohibts extortion generally as part of the Hobbs Act (18 USC 1951):
The term “extortion” means the obtaining of property from another, with his consent, induced by wrongful use of actual or threatened force, violence, or fear, or under color of official right.
In the case you've described, threatening to start a new business is not a use of force, or violence, nor is it "under color of official right," which generally refers to the exercise of your authority as a government agent.
The most you could say is that it is intended to instill fear, but the statute additionally requires that the use of fear be "wrongful." I can think of no legally plausible argument that threatening to compete under the described circumstances would be considered wrongful.
State laws generally impose similar requirements. Pennsylvania, for instance, defines extortion as a theft offense, at 18 Pa. C.S.A. § 3923:
A person is guilty of theft if he intentionally obtains or withholds property of another by threatening to:
(1) commit another criminal offense;
(2) accuse anyone of a criminal offense;
(3) expose any secret tending to subject any person to hatred, contempt or ridicule;
(4) take or withhold action as an official, or cause an official to take or withhold action;
(5) bring about or continue a strike, boycott or other collective unofficial action, if the property is not demanded or received for the benefit of the group in whose interest the actor purports to act;
(6) testify or provide information or withhold testimony or information with respect to the legal claim or defense of another; or
(7) inflict any other harm which would not benefit the actor.
As you described the situation, the employee is attempting to obtain the property (additional money) from another (the employer), but he is not doing it by a prohibted means. Quitting and starting a competing enterprise is not (1) a criminal offense or (2) an accusation of one; (3) it does not expose any secret; (4) it is not official action; (5) it is not "collective action," and the property demanded is for the benefit of employee; (6) it is not testimony regarding a legal claim; and (7) the only harm inflicted would benefit he employee.
In short, extortion laws should not present any barrier to the creation of a competing business.
Not legally. It may be practically, though.
The Southern Pacific Railroad has lines both in the Mojave Desert and Bakersfield. They decided to connect them with a VERY expensive railroad through the Tehachapi Pass.
The Santa Fe Railroad also has lines in Mojave and Bakersfield. They sent out laborers to make a show of building their own line.
Southern Pacific crunched the numbers. There wasn't enough business to support two railroads, given their expense. (Santa Fe knew this). So SP said to Santa Fe, "This is suicide for both of us." Santa Fe agreed and they shared the line.
That can be an issue. If there are 2 lawn care companies in your community, now there will be 3, and it's possible all 3 will starve. However if there are 49, then his successful splitting off would be a drop in the bucket.
There might also be restrictions on stealing customers.
There are some limitations on acting on insider knowledge you obtain at a company. For instance if 100% of their new customers are your former customers, you can accuse them of essentially stealing your customer list. (Tom Cruise in Jerry Maguire got away with this only because he was so spectacularly awful at it, only getting 1 client.)
However, if there are other ways an outsider could obtain this information, such as in ordinary activity noticing where your crews are active, or canvassing everyone's customers including yours, then you can't stop them, and they can raise that as a defense. The simple fact is personalities do count; if he's been the direct contact person at your company, and they recognize and trust his smiling face, you can't do anything about that.