Does SiliconValley Really Thrive Without Non-Compete Agreements?
I love non-compete clauses. I can go on for hours, maybe even days if there are donuts around, about this particular issue.
If deployed correctly, restricting key employees from competing when they a company leave makes the intellectual property assets of a company easier to protect, start-ups easier to finance, and incents employees to produce. The harder it is for founders or key employees to leave a start-up and pursue the same innovation elsewhere, the better.
During the last two or three years, however, mine has not been the most popular view. Outside of Silicon Valley it has become de rigeur to decry the practice of requiring start-up employees to be bound by non compete and non solicitation restrictions. Critics argue that clauses like this stifle innovation. They point to California, where non-compete clauses are void by state law. California’s ban, they say, allows a free flow of ideas as employees churn between start-ups, which in turn stimulates the continuous generation of new start-ups and innovations.
Over in New England, Spark Capital's Bijan Sabet and others have even convinced Massachusetts legislators to take a similar “open source” approach. In January 2009 legislators even introduced a bill that would copy California's ban on non-compete clauses in employment agreements.
Yeesh.
Now, it seems I’m not the only one who rejects the idea of open source innovation - some of Silicon Valley's larger players may also feel the same way.
Yesterday came news that the United States Department of Justice has opened an investigation on the recruiting practices of Silicon Valley companies like Google, Apple, Yahoo!, Genentech and several others. The investigation is looking into whether the companies entered into agreements to not actively recruit talent from each other, which may be a violation of antitrust laws.
Stay tuned.
If deployed correctly, restricting key employees from competing when they a company leave makes the intellectual property assets of a company easier to protect, start-ups easier to finance, and incents employees to produce. The harder it is for founders or key employees to leave a start-up and pursue the same innovation elsewhere, the better.
During the last two or three years, however, mine has not been the most popular view. Outside of Silicon Valley it has become de rigeur to decry the practice of requiring start-up employees to be bound by non compete and non solicitation restrictions. Critics argue that clauses like this stifle innovation. They point to California, where non-compete clauses are void by state law. California’s ban, they say, allows a free flow of ideas as employees churn between start-ups, which in turn stimulates the continuous generation of new start-ups and innovations.
Over in New England, Spark Capital's Bijan Sabet and others have even convinced Massachusetts legislators to take a similar “open source” approach. In January 2009 legislators even introduced a bill that would copy California's ban on non-compete clauses in employment agreements.
Yeesh.
Now, it seems I’m not the only one who rejects the idea of open source innovation - some of Silicon Valley's larger players may also feel the same way.
Yesterday came news that the United States Department of Justice has opened an investigation on the recruiting practices of Silicon Valley companies like Google, Apple, Yahoo!, Genentech and several others. The investigation is looking into whether the companies entered into agreements to not actively recruit talent from each other, which may be a violation of antitrust laws.
Stay tuned.
posted by Suzanne Dingwall Williams at
8:16 AM
13 Comments:
So here's a thought. Would you be prepared to sign a non compete at your law firm?
If I needed other people's money invested in me in order to develop innovations that were the core of my business, then I see no problem in providing those investors with an assurance that, once I've leveraged their cash to create value, I won't leave to go elsewhere and capitalize on that value, leaving them without a liquidity event.
That's great. I've been there and done that. 9 months after the investment things went south as they so often do. I was stuck with a 2 year non compete and no ability to generate income. I will only sign a non compete again under one condition - it becomes a consulting agreement and I get paid to sit on the beach. One person in a company is just never that important in the big scheme of things and if they are then be reasonable.
Can you imagine not being able to practice law for a year under a non compete. I doubt it.
The core of my practice is spent representing entrepreneurs, so my perspective is informed by that. I would not have counseled any founder to sign the kind of non-compete you describe. But I believe that it's unrealistic to expect outside investor support for your start-up without some kind of non-compete which is apporpriate.
Then we have to respectfully disagree with each other. I've been an entrepreneur for close to 20 years now and will never sign another non compete. I'm simply not that important in the big scheme of things. In the case that you do have dependencies (every start up does) then be reasonable and put a 6 month term on it and pay them to sit on the beach. The suits put way too much emphasis on these things vs finding a team who can really execute and who are in alignment from day one.
And if the investor insists on it before doing the deal and you don't like the terms just say no.
Sales solves all kinds of issues.
Not sure we're disagreeing. I don't happen to think the non-compete you once signed was reasonable, and it appears neither do you. There are lots of ways to negotiate one that addresses investors concerns and that also are reasonable. Same goes for non-competes for your key employees. You've suggested some in your posts.
If you want to take an absolute stance, or don't have a reasonable investor, you can either walk away from that money and shop for other sources of capital, or grow organically without outside money. So far we seem to agree on all points.
But the tricky question is, why would someone invest in your business (especially at an early stage, where they're really investing in you and your ability to execute)if you were free to leave at any time AND join a competitor? I think it would be useful to hear from investors of entreprenerus who have successfully negoitated away the issue when it was a closing requiremetn of an investor
It all boils down to "what's reasonable" Mine was unreasonable and it was my fault for signing it. The key is to look at everything in it's entirety. How many startups make with the core team intact. Virtually none. Code is important but in my opinion no where near as important as execution in the marketplace. Young entrepreneurs learn the hard way - I did. As we get older and wiser we look for people who are aligned with our goals and we with there's. From that you can build something that has value to the stakeholders.
A non compete has to be reasonable, just as a liquidation preference must be reasonable and so on. It's bloody hard to build a successful business anyway without going crazy on the T's and C's.
My focus is now very simple, solve a real customer problem and generate measurable, sustainable, profitable revenue from volume. Do that well and investors will want to invest in you.
What the hell was that? The written equivalent of a lengthy tennis volley, I suppose. Hey, Cranstone, if you really sat out two years because of your non-compete, you're an idiot. Did you ever think of telling your former employer to "suck it," compelling said former employer to try to enforce what seems to have been a very unreasonable non-compete?
I didn't wait two years. I started another company which built the worlds first secure operating system. As for being an idiot... well I happen to respect legal documents that I sign. It just required that I reinvent myself and not compete in the area of content acceleration (I'm one of the inventors of mod_gzip (you can look it up on Google). The good news is that his company is now bankrupt. Got to love the Karma gods.
Most people victimized by non-competes are not early stage entrepreneurs entering into a negotation with an investor. In environments where non-competes are legal, they become de-riguer for every technology job. The result is lower level employees with unclear and potentially unenforceable agreements that they cannot afford to challenge. They avoid taking jobs they are most qualified for out of fear of retaliation, reducing liquidity of labor markets and the economic value of knowledge workers.
The value of non-competes to investors or employers is low. But because these agreements are standard, no one will take the risk of being the first to not have them. The only way to break the deadlock is to remove them or severely limit them via legislation.
How often have you successfully enforced a non-compete to protect the interests of an investor or company?
Now that is a well thought out and reasoned response.
Hi.. nice blog here..
Attorney companies
I stumbled on the blog while doing some reading on VC's....linked from Venture Hacks
The non-compete clause makes me giggle...in my business of animation ,freelance artists are often told to sign "contracts" which don't gaurantee any type of job security and yet have non-compete clauses . Still I've never seen anyone sued either way....for unwarranted termination or moonlighting . I have been yelled at for poaching someone elses unemployed artists though!
I have ideas on how to run an animation business better....but it's not a get-rich easy or quick industry I can assure you !
Dermot
http://zoomfrog.blogspot.com/
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