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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.

Scott Kirsner's article in yesterday's Globe and his related blog post cover the issue well, including the articles that Scott links to.  I see two aspects to this:

  1. 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.
  2. 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.

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Comments

Anthony,
To be clear, this discussion is about non-compete agreements, not non-disclosure agreements (NDAs). I think that it is critical that employees agree to keep company confidential information to themselves even after they leave their job. But, it is possible to work for a competitor without disclosing such information (although sometimes it does get tricky). So, I am in favor of changing the law to do away with non-competition agreements, but still in favor of keeping non-disclosure agreements.

You are right that companies ask you to sign agreements like this as a condition of employment. You have no leverage here, as you point out. So, that's why the law has to change to eliminate their enforceability.

Michael:

Best wishes for a wonderful New Year's Eve celebration with family and friends!

I just wanted to say I appreciate your thoughts on openness, which seems to be a popular theme lately. Since NDAs are all about making money, how to convinve people that they don't need them? I would guess they only benefit one party of the agreement, unless you consider it as a kind of blackmail, which is kind of is, because an employee is forced to sign one as a term of employment. No NDA, no job.

Anthony Kuhn

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