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The Non-Compete Clause

There has been a flurry of activity in some blogs about whether it is worthwhile for employers to require employees to sign non-compete clauses as a condition of employment.  Bijan Sabet, a VC at Spark Capital in Boston, had written about this a couple of times before.  Over the weekend he said that he didn't believe in these clauses and said that Spark would not longer require companies to have these in place for their employees.  I wonder if Spark's co-investors in future deals with agree.

Fred Wilson from Union Square Ventures disagrees.  Both posts have lively comments which are worth reading.

Having been an operating guy and a VC, I've seen both sides of this issue.  Also, I was once personally sued under a non-compete clause as one employer tried to keep me from taking a job at another company.  It's nice to be wanted, but that wasn't a lot of fun.

In my case, the non-compete clause of the first employer was very broad, making it almost impossible to enforce, even in Massachusetts.  And, my new employer, although in the same industry as my first employer, was also a partner that we had a cooperative relationship with.  So, it was tough to make the case that it was a pure competitive issue.  The case didn't last long in court (15 minutes on a hearing for a temporary restraining order), but I did have to reaffirm my commitment to the confidentiality of the information I had from my first employer.  I'm a strong believer in that.

Clearly, a non-compete clause, if well crafted and enforceable, protects the interest of a company.  VCs have a responsibility to protect the interests of their companies, so they should ask for such clauses.  But, these clauses should be narrow and fair.  If someone leaves voluntarily, they should be able to be restrained from joining a direct competitor of the products they worked on.  This can apply to big companies and small. 

Since these laws don't apply in California, investors there can't get such protection.  I agree with Bijan that this hasn't hurt entrepreneurship in California, but it has probably spawned more lawsuits from companies that may have started with or benefited from information gleaned from someone hired from a competitor.  I know that these are really issues of confidentiality, but they start from the fact that the there is no non-compete clause which is restraining job transfers.

I don't agree with Bijan that the presence of a non-compete clause has significantly impacted the development of start-ups in Massachusetts.  It may be a small factor, but I think that the issue is more of the overall attitude about starting companies.  Here's a comparison:

In Silicon Valley, when you tell your boss that you are leaving your job to start a company, they say "Great, I want to invest!"  In Massachusetts, they say "You can't', we'll sue you!"  This story works even if the start-up isn't a direct competitor.  No one wants to go to court, so the threat of the lawsuit is a big issue.

In summary, I'd like to see the courts require that non-compete clauses be narrow and fair.  If you really do restrain someone from working, you should pay them for their time.  But, these clauses have to be narrow enough to give the employee freedom without harming the company's interest.  I also think that it matters how you leave the company.  If you leave voluntarily, then you should be more constrained.  If you are fired, laid off, or forced to leave for "good reason", then you should have fewer shackles.  If you are so valuable, then they shouldn't want to see you go.


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