Time for Non-Compete to go
I've been thinking a lot about the non-compete clause in venture deals since the issue was first brought up by Bijan Sabet at Spark Capital. Kudos to Bijan for raising the issue and taking a stand against non-compete clauses.
- What's the best environment to foster entrepreneurship? Should employees be free to move from one job to the next without worrying about joining a competitor (but still protecting proprietary information, which everyone in the discussion respects)? Or, should employers be able to restrict the movement of employees to competitive firms? Although big and small firms may have different points of view on this, the same rules need to apply to both.
- In the current environment, what should companies do about non-compete clauses? Should they take advantage of existing law and restrict employees, or take a principled stand against these clauses and put themselves at some sort of disadvantage versus others?
In the first question, I think that the data shows that there is little corporate harm from the free movement of employees and some evidence that this free movement fosters more entrepreneurship. As a believer in freedom first, I have to come out in favor of changing the laws to invalidate non-compete agreements. Since it's clear that companies can thrive in such an environment, it's hard to say that this will hurt companies. Every company loses the ability to control where its employees works, but also gains the ability to more directly hire employees from competitors. So, the best companies should win.
It's logical that restricting the movement of employees hurts entrepeneurship, but I wasn't as convinced by the actual data. It was limited. But, the data is consistent with what logic would tell you.
As for the second point, that's a tougher one. It's great to take a principled stand as Spark has done by saying that they won't require employees of their companies to sign non-compete agreements. What about existing companies? What about their co-investors who see things differently? What about their commitment to their investors where they have a responsibility to do everything they can that is legal and ethical to make their companeis successful?
That's where I think that as long as the laws are the way that they are, companies should take full advantage of them. VCs have an obligation to their investors to do this. If you disagreed with a perfectly legal form of tax shelter, you can choose not to pursue it with your own money. But, unless you tell your investors up front that you will pursue such a strategy, you have an obligation to maximize their return and take advantage of such a thing. I think that this is analogous to the non-compete clause.
So, I support Spark's efforts and the Alliance for Open Competition. But, until there is either a new law or widespread support for dropping such agreements, I think that VCs have a responsibility to take advantage of the laws that help their companies. It's tough being conflicted on this, but to do otherwise may be principled, but also disadvantageous.