Scott Kirsner has a post on some recent research out of Harvard about the effect on non-competes in Michigan. http://tinyurl.com/2wu9a2
vruz
· 2 years ago
narrowly defining competitors by their name doesn't seem like a good idea. for example, say Meebo was in the business of instant messaging but now offers voip too. if an hypothetical voip left out meebo off their competitors list, they would be in trouble. how to define competition is most of the time a matter of point of view.
it always fascinated me the first lesson ever on the classic book about "marketing myopia" when the railroads went belly up because they thought they were in the train business rather than the transportation business.
it would be really unfortunate to leave that door open because of marketing myopia. defining a market too narrowly can be just as bad as defining too broadly.
fredwilson
· 2 years ago
i didn't mean to suggest that the competitors should be named. that is a bad idea.
i meant that the nature of what is competitive should be defined, web-based jobs aggregation in the case of indeed, web-based personal finance services in the case of wesabe, a marketplace for buying and selling handmade goods in the case of etsy.
so on and so forth
fred
vruz
· 2 years ago
got your point right, just essaying some thoughts on how sensitive this balance must be, and how it can dangerously be related to market myopia if not analysed in full detail.
first , thanks for the thoughtful post. (disclaimer: i'm typing this on an iphone so please excuse typos and short sentences)
I hope i iddin't say that this was the primary reason for MA lagging behind CA. But I do think it's an important factor.
few additional thoughts in reply:
i'm all for protecting NDAs and trade secrets. but non-competes are a different animal.
-your examples are from inside an existing startup which is fine. but consider when a big company tries to keep their employees from starting a new company. the legal language is most often broad, vague and problematic. and it's a condition of the offer letter. i guess we can try and perfect a narrow defnition and a "direct competitor" list but that sounds like a legal headache and most employees don't have means, ability to negotiate this at the time they accept his/her offer letter.
-most employers don't pay for employees to sit on the beach.
-a lot of folks have built their careers around a speciality (gaming, advertising, finance, venture capital, databses, content etc). non-competes cause a huge problem for these people. and when I talk to people in MA & NY, i hear about this again and again. people in MA and NY have told me about lawsuits and saber rattling from big companies.
-why should employees have more rights in CA than in other states?
-you said mgmt and key personnel should agree to the non-compete clause. so everyone else is free and clear?
thanks again for posting on this subject.
fredwilson
· 2 years ago
good points Bijan.
most employers don't pay for employees to sit on the beach but i am willing to do that in the case of our portfolio companies and their non-competes. if you want to force someone not to work, then there should be a cost.
i don't know how to solve the big company problem and i am not going to. i can only focus on what our portfolio companies should and shouldn't do.
employees may have more rights in CA but companies have less. i think CA's non compete rules are onerous on companies.
i think the portfolio company should have the right to determine who they want signed up to a non-compete. i agree that requiring everyone to do it is a big much, but often that's the best way to ensure that the key employees are signed up. if you make something required, it gets done. if you don't, it often slips through the cracks.
fred
bijan
· 2 years ago
"employees may have more rights in CA but companies have less. i think CA's non compete rules are onerous on companies."
I think this is one point that we would probably would have to agree to disagree then. I believe that being onerous on employees is worse than being onerous on companies in the long run.
fredwilson
· 2 years ago
Bijan
It's fine for us to agree to disagree but since we are having this debate out in the open, let me be clear about what I mean on this point
Let's say you've built a killer product and have assembled a fantastic team. You want to bring on a VP Sales.
You spend six months getting that VP Sales up to speed on your market, your product, your technology, and your team
Then the knockoff competitor who is copying your every move hires your VP Sales and gets access to all that knowledge
You are screwed and I think there needs to be some recognition of that concern and protection for entrepreneurs from that happening
California refuses to recognize this issue and I think its wrong to do so
Fred
Jay Parkhill
· 2 years ago
California doesn't exactly fail to recognize the issue. It won't enforce flat-out non-compete restrictions, but it does say that an employee can't use confidential information belonging to employer A in the service of employer B- including things like customer lists, business plans and products plans as well as technical "IP".
To people accustomed to the more stringent restriction available in other states this probably sounds loosy-goosy, but it actually gets pretty close to the same place. It may cause real-world problems a bit more often than in MA or NY (for example), but in percentage terms I'd be willing to bet the difference is pretty minor.
In Fred's example Employer A can advise Employer B that VP Sales is under a confidentiality obligation. Especially in startup contexts, the offer letter gets rescinded pretty quickly- in part because the (smart) letter itself makes VP Sales affirm that she is not under any confidentiality restrictions.
bijan
· 2 years ago
hi jay, it actually is quite different actually. anyone from yahoo, google, apple, ebay, etc can leave their company and start any company they want as long as they don't breach their NDA and non-solicitation agreement.
that is very different than the conditions in NY or MA.
Jay Parkhill
· 2 years ago
We are saying the same thing. The point of your original post, I think, was that a blanket non-compete puts an extra burden on employees when the NDA restrictions accomplish the practical objective. My comment above attempted to agree with you- the NDA gets the job done in most cases.
Steve Kane
· 2 years ago
hey guys
fred, this is a distinction without a difference. imagine if the "knockoff competitor" is google, or news corp, or microsoft. those humungous companies simply look at the startup/small company and say "so sue me" and offer protection to the VP Sales.
so non-competes put small companeis at huge disadvatnge versus big companies
and in any case, startups simply cant litigate, even against an individual -- VCs rarely if ever agree to fund litigation
also, in the end, yes it would be great if startups and small companies could pay people severance or "stand still" (non compete) compensation. but the truth is, they can't or won't and never do.
so non-competes are a de facto -- huge -- compensation reduction for people: they think they are being compensated on an annual basis, but in fact they are required to take themselves off the market for an additional period of time, without any compensation
to put it in perspective -- why is that directors of companies are never required to sign non-competes? because they are smart and would never serve on boards if they had to. yet they are privy to the most sensitive and competitive information...
DM
· 2 years ago
Keep in mind that being onerous on companies often translates to being onerous on employees. For example, French law makes it extremely difficult to fire employees, and this results in very high unemployment because employers are reticent to hire anyone, for fear they won't be able to vary their workforce size in relation to their business. That means a large group of unemployed, which causes social unrest.
In this case, preventing employer/employee noncompete contracts could make companies less likely to hire people, and in the event they do, less likely to invest resources in that person.
bijan
· 2 years ago
DM, I disagree that getting rid of non-competes means less hiring. Tell that to the folks in Silicon valley. They can't hire enough people fast enough.
DM
· 2 years ago
Any restriction on the employer causes less hiring, because it raises the effective price of labor and thereby reduces demand--that's just basic economics. The Valley has high labor demand relative to the rest of the US for other reasons, but that scarcely means that the region no longer operates by supply and demand (if labor were cheaper/less risky, there would be even higher demand).
Imagine two Silicon Valleys that were identical in all respects (ceteris paribus) except one had a law preventing noncompetes and one did not. There would be higher demand for labor in the latter. (But rockstar employees would likely be able to negotiate it out in any environment with high labor demand.)
anamax
· 2 years ago
You're assuming your conclusion. The advocates of banning non-completes claim that NCs hurt companies more than they help them. Your "imagine" specifically excludes that possibility.
It's not obvious that they're wrong - non-competes may well have the same sort of effect as restrictions on firing, and it's pretty clear that they reduce hiring.
Note that non-competes directly reduce the supply. Their effect on demand is second order.
Simon Cast
· 2 years ago
In someways the non-competes are ways for a company to get out of paying the "market price" for an employee. In particular star employees. While I understand you would pay for someone to sit on the sidelines, even doing that the particular employee is losing out for the six months of a higher salary and other benefits he or she would be accruing at the new company. Are you going to pay what the employee was offered at the new company?
My concern and issue with non-competes (and yes my contract includes non-competes) is that they are anti-competitive tool. By not allowing companies to compete for a labour they end up seeing the market value of the labour priced lower than it would otherwise be. Now should you wish to keep non-competes then there should be a clause that requires the automatic re-negotiation of re-numeration and benefits as the market price for the employee is obviously higher than what is being provided by the company.
My other main issue with non-competes is that they also become an excuse for the company not to deal with employee or morale issues. Without the freedom of movement there is no penalty for a company in not addressing those issues. The fastest and most painful wake up call is for several key employees to leave.
If non-competes are kept I would limit their use to companies of certain size and/or revenue. I don't think they make sense once a company gets past a certain revenue/size for them to be able to use non-competes.
fredwilson
· 2 years ago
I agree that the larger a company is the less sense a non compete makes but that's arguing the point from where I sit
Fred
David Nelson
· 2 years ago
Simon - I like free and open markets as much as the next guy but in this case I do support the validity and use of non-competes (which you reasonably describe as "an anti-competitive tool"). I think the rationale for this is analogous to that for the granting of patents over new IP.
That is by establishing a temporary monopoly over the use of an asset (for IP a patent lasting 20 years; for labour markets a non-compete of say 6-12 months) you provide organisations the necessary incentive and protection to innovate, take risks and create value.
In a world without non-competes then I think these companies and star employees would both have less capacity to create value and consequently be worth less so it is a symbiotic relationship.
I would add that I think the use of non-competes is most justified for founders and/or senior employees where they hold a material equity/options stake.
Simon Cast
· 2 years ago
I tend to err on the side of as much competition as possible and as such have a general dislike of them as an anti-competitive tool. And you are right in pointing out that non-competes essentially do create a temporary monopoly on the person's supply of labour.
Following the analogy of IP, then there should be a legal quid pro quo for a company to use non-competes so that some thought does go into their use. For non-competes, I would suggest a legal requirement to pay either on the employees current salary with a penalty rate to reflect the loss of (usually) higher salary that the employee is suffering due to the non-compete. The Austrian legal requirement of null when the employee is fired is also a good idea I think.
I don't think that non-competes are the best method for dealing with cases where the employee has walked off with the contacts DB or similar trade secret. I can understand why they are used that way as they allow the information to "rot" and therefore decrease the value of the information or secret.
My main concern still remains the depression of market price for the persons' labour. I understand Fred's concern as an investor but essentially by enforcing non-competes his portfolio companies are not paying market price for that person's labour. Even though Fred's protfolio companies are paying the person to be the Twelfth Man (http://en.wikipedia.org/wiki/The_Twelfth_Man) they are paying him at the current salary and not the person's market rate. None of the arguments seen about keeping non-competes address the issue of requiring payment of market price for the person's labour.
D. C. Toedt
· 2 years ago
At my former company, where I was GC before we were acquired, we had what I thought (cough, cough) was a pretty good noncompete clause in our employment agreement form. The basic idea was that if the departing employee played nice by letting us know before going to work for a competitor, we'd try to play nice with them by not unreasonably objecting to their new employment, provided that our confidentiality interests were suitably protected.
On the front end, this noncompete clause seemed to be a lot easier for new employees to accept when they reviewed the employment agreement we asked them to sign. On the back end, the clause paid off on several occasions when employees actually left to go to work for a competitor: It gave us a vehicle to work with the new employer to protect our interests without having to battle it out in litigation. And in some cases the resulting professional working relationship between the companies' GCs paid off later when other potential disputes arose.
fredwilson
· 2 years ago
that's a great suggestion. there's no doubt that this whole issue needs to be reconsidered but i am not thrilled about throwing in the towel on the concept either.
fred
cranstone
· 2 years ago
Totally agree with this post. Years ago I was naive enough to sign a non compete without a "paid to sit on the bench clause". I will never do that again. It worked out ok as I started another company focused on something entirely different (secure operating system for Itanium). Bottom line - it's all about a quid pro quo. You don't get something for nothing anymore. I'm willing to sign one, however you have to willing to pay me if you want to bench me.
fredwilson
· 2 years ago
You sound like Chad Pennington or Stephon Marbury :)
All kidding aside, that is how I think about it too
fred
mfeinstein
· 2 years ago
I'm with you, Fred. And, as an operating guy, I was even sued once under a non-compete. The problem there wasn't that it existed, it was that it was too broad. I'd like to see the courts narrow the applicability of these clauses so that they provide strong but narrow protection for the company without being too onerous on employees.
As an investor, I think that you have a responsibility to secure such protection for your company as long as the courts allow it and it doesn't put you in a weak position for recruiting. Backing off from that may go against your responsibilities to your investors and to the company.
fredwilson
· 2 years ago
That's a pretty strong endorsement from someone who has been sued over one!
Thanks mike
fred
dhgoodman
· 2 years ago
My experience has been uniquely from the side of enforcing non-competes. My first company was a bootstrapped startup that got to be about 100 employees. I had a key sales employee leave (with our contacts database) for a competitor. In arbitration, the non-compete was ruled to be unenforceable (in Pennsylvania). My second company was venture-backed. Similar results with an engineering employee.
I agree with non-competes in concept, but my experience has been that they are unenforceable from the perspective of denying a person the right to work in their field and make a living. This may be unique to a smaller player, but legal wrangling usually boils down to common sense when you get in front of an arbitrator or judge. That said, I would think that payment for a period without employment may be enforceable. But denying anyone the right to work and to opportunity is an uphill battle.
Notwithstanding the above, I agree with the concept in of non-competes theory.
DM
· 2 years ago
Aren't employees walking out with contact databases considered to be stealing company property, and therefore liable for damages, regardless of noncompete terms? They can "remember" contacts but walking out with the database is, as far as I remember, illegal.
Mapo
· 2 years ago
Fred, what about non competes in shareholder agreements? In the case of the VP Sales walking to a competitor, do you withdraw their equity, terminate their options, etc?
fredwilson
· 2 years ago
Yes
awilensky
· 2 years ago
In terms of employment contracts, which are very different than consulting contracts, the duties and ownership of IP are fairly well defined. In an outside analyst's SOW, it often states that the party contracted for opinion and adjudications of strategy cannot be enjoined from using this knowledge in other venues, but that quantitative and survey result datasets are property of the client.
Term sheets, as Mr. Wilson knows. are very different animals and much more complex. often being accompanied by key person riders and E&O underwriting policies.
It's all very messy; you can't (even in MA) stop someone from using their experience, but you can try to stop the misappropriation of actual IP. None of this is ever easy.
Michael Masnick
· 2 years ago
Hi Fred...
I usually agree with you, but on this one I think you're wrong. I've been working on a research project for nearly a year now, and as a part of it, went through a tremendous amount of research on the impact of non-competes. There is fairly compelling research (mostly done in the past ten years) on the differences in economic growth among tech companies in Boston vs. Silicon Valley -- and the *key* factor that shows why N. Cal succeeded where Boston petered out was the existence of non-competes.
It's almost scary how strong the evidence is concerning how important the lack of non-competes is... I've been meaning to write up a more detailed look at the issue, and this may convince me to get my act together to do so...
In the meantime, it actually makes for a really strong parallel to questions about DRM. DRM restrictions don't work and tend to only hold back the recording industry. Non-competes are effectively DRM on employees. They don't do what they're supposed to do and then end up only restricting what people want to do and what's necessary to grow a market. Both seems to make sense in the short-term for a company trying to block what others are doing, but in the long term, both are dangerous strategies that limit the potential of a market.
Mike
fredwilson
· 2 years ago
Can you share that research with us? It's just hard to believe that one factor, particulalry non competes, is the difference in the two regions
Fred
Michael Masnick
· 2 years ago
Hi Fred,
Working on a post to put on Techdirt that highlights & discusses much of the research... hope to finish it tonight or tomorrow morning...
Mike
MarkWaterstraat
· 2 years ago
This is a great topic Fred, and the comments, as is often the case here, are as valuable reading as your post. I'm currently interviewing new people for our post funding next stage ramp, and I can say emphatically that I'm including noncompetes -- even though I know from experience that they often aren't enforceable. I know that not everyone I ever hire will work out, but I do want to foster an environment among the new team which is consistent with the founding team -- we're all in this together to win. I have no trouble telling an applicant that if they aren't committed, I don't want them. I personally left a company once to go to a much larger competitor, but I told the competitor I would only accept an offer if it were in a part of the company which wasn't directly competing with my former employer. The formal noncompete in my employment agreement was not enforceable, but the "honor" part of it was -- to me. The offer letter and employment agreement to me are as valuable in setting expectations as they are legally.
Sebastian
· 2 years ago
I recently took over a management position in an Austrian start up and looked at Austrian law, which clearly states the following:
1. Non-Competes are only allowed if you earn a more than 2150 Euro gross per month, so they try to allow that only for higher ranking staff.
2. Non-Competes can only be enforced if an employee leaves the company on his own. If the company fires or lays off an employee, no non-compete will work.
I think that these rules are good. Non-Competes shouldn't work for the normal employees and also not, if the employee is fired. If a company fires an employee and he choses to work for a competitor after that, the company should have no possibility to hinder them from doing so. If the employee is so valuable, he shouldn't have been fired in the first place.
NICCAI
· 2 years ago
I think you and Bijan are both correct, but it has more to do with the reach of the non-compete (as many have commented). For many companies, they are ridiculously broad - to the point of being unenforceable. Many try to protect an entire vertical. To the employee, this is just scary, and unfair - after all, doesn't he/she just want to sign with you? Can a car dealer stop a sales man from switching dealerships? I venture to say, no. That said, I think the beach idea has some merit - but it should also preclude the employer doing the beaching from also hiring from the new employer during the same period. Tit for tat.
All and all, I think they lend more to litigation and increased opportunity cost than they do to protecting a company's assets. When all is said and done, if that star employee is leaving because of money, you have bigger problems.
Anthony Kuhn
· 2 years ago
Fred:
the hardest part of your excellent plan to have corporations share the burden of a non-compete agreement would be getting them to agree to it!
I like it, sure, but how many companies would be willing to put their money where their mouths are? I mean, what's in if for them if they have to pay an employee to not work?
Anthony
Stephen L. McKay
· 2 years ago
Fred, Once again I must agree with you. I have to say that as a long time ago, low level employee of a compny called "Guest Informant" (long before they were bought by Lin, long before more, and long before our tech age), I made a move to replace some of the markets the company was dropping due to lagging sales, with my own books, and was hit right in the face with the "legal team". I was not going to take any market share that the company had not already given up, but who knows where it may have gone. The line is fine for sure, and I don't mean to press the point, but old media/ new media is not a fluid transition. As we endure this rocky road however, some of the old rules of business will always apply. What I would like to see are the stats. Who (not names, just stats) have either of your firms incured losses (had defectors) directly related to violations of the clause?
There are 2 situations for NDA's. Between strategic partners and employees. For strategic partner/investors it is useless. My attitude is if i can't tell you my idea and out-execute you then i shouldn't be doing it. Between employees it is good so people don't steal clients and leave.
awilensky
· 2 years ago
Ah...execution as replacement for the all powerful protector of IP, the patent. "Have you patented this new ThruDispatch idea?" Says one older angel.
"Not yet", I replied, "There may be code patents on the eventual mechanism that serializes the virtual dispatcher threads, but today;s technology patents for software innovations are in a state of great turmoil." I continued, "Often, it is the execution of the concept that survives long after the first patent fights are won and lost."
All Comments
for example, say Meebo was in the business of instant messaging but now offers voip too.
if an hypothetical voip left out meebo off their competitors list, they would be in trouble.
how to define competition is most of the time a matter of point of view.
it always fascinated me the first lesson ever on the classic book about "marketing myopia"
when the railroads went belly up because they thought they were in the train business rather
than the transportation business.
it would be really unfortunate to leave that door open because of marketing myopia.
defining a market too narrowly can be just as bad as defining too broadly.
i meant that the nature of what is competitive should be defined, web-based jobs aggregation in the case of indeed, web-based personal finance services in the case of wesabe, a marketplace for buying and selling handmade goods in the case of etsy.
so on and so forth
fred
http://en.wikipedia.org/wiki/Marketing_myopia
I hope i iddin't say that this was the primary reason for MA lagging behind CA. But I do think it's an important factor.
few additional thoughts in reply:
i'm all for protecting NDAs and trade secrets. but non-competes are a different animal.
-your examples are from inside an existing startup which is fine. but consider when a big company tries to keep their employees from starting a new company. the legal language is most often broad, vague and problematic. and it's a condition of the offer letter. i guess we can try and perfect a narrow defnition and a "direct competitor" list but that sounds like a legal headache and most employees don't have means, ability to negotiate this at the time they accept his/her offer letter.
-most employers don't pay for employees to sit on the beach.
-a lot of folks have built their careers around a speciality (gaming, advertising, finance, venture capital, databses, content etc). non-competes cause a huge problem for these people.
and when I talk to people in MA & NY, i hear about this again and again. people in MA and NY have told me about lawsuits and saber rattling from big companies.
-why should employees have more rights in CA than in other states?
-you said mgmt and key personnel should agree to the non-compete clause. so everyone else is free and clear?
thanks again for posting on this subject.
most employers don't pay for employees to sit on the beach but i am willing to do that in the case of our portfolio companies and their non-competes. if you want to force someone not to work, then there should be a cost.
i don't know how to solve the big company problem and i am not going to. i can only focus on what our portfolio companies should and shouldn't do.
employees may have more rights in CA but companies have less. i think CA's non compete rules are onerous on companies.
i think the portfolio company should have the right to determine who they want signed up to a non-compete. i agree that requiring everyone to do it is a big much, but often that's the best way to ensure that the key employees are signed up. if you make something required, it gets done. if you don't, it often slips through the cracks.
fred
I think this is one point that we would probably would have to agree to disagree then. I believe that being onerous on employees is worse than being onerous on companies in the long run.
It's fine for us to agree to disagree but since we are having this debate out in the open, let me be clear about what I mean on this point
Let's say you've built a killer product and have assembled a fantastic team. You want to bring on a VP Sales.
You spend six months getting that VP Sales up to speed on your market, your product, your technology, and your team
Then the knockoff competitor who is copying your every move hires your VP Sales and gets access to all that knowledge
You are screwed and I think there needs to be some recognition of that concern and protection for entrepreneurs from that happening
California refuses to recognize this issue and I think its wrong to do so
Fred
To people accustomed to the more stringent restriction available in other states this probably sounds loosy-goosy, but it actually gets pretty close to the same place. It may cause real-world problems a bit more often than in MA or NY (for example), but in percentage terms I'd be willing to bet the difference is pretty minor.
In Fred's example Employer A can advise Employer B that VP Sales is under a confidentiality obligation. Especially in startup contexts, the offer letter gets rescinded pretty quickly- in part because the (smart) letter itself makes VP Sales affirm that she is not under any confidentiality restrictions.
it actually is quite different actually. anyone from yahoo, google, apple, ebay, etc can leave their company and start any company they want as long as they don't breach their NDA and non-solicitation agreement.
that is very different than the conditions in NY or MA.
fred, this is a distinction without a difference. imagine if the "knockoff competitor" is google, or news corp, or microsoft. those humungous companies simply look at the startup/small company and say "so sue me" and offer protection to the VP Sales.
so non-competes put small companeis at huge disadvatnge versus big companies
and in any case, startups simply cant litigate, even against an individual -- VCs rarely if ever agree to fund litigation
also, in the end, yes it would be great if startups and small companies could pay people severance or "stand still" (non compete) compensation. but the truth is, they can't or won't and never do.
so non-competes are a de facto -- huge -- compensation reduction for people: they think they are being compensated on an annual basis, but in fact they are required to take themselves off the market for an additional period of time, without any compensation
to put it in perspective -- why is that directors of companies are never required to sign non-competes? because they are smart and would never serve on boards if they had to. yet they are privy to the most sensitive and competitive information...
In this case, preventing employer/employee noncompete contracts could make companies less likely to hire people, and in the event they do, less likely to invest resources in that person.
I disagree that getting rid of non-competes means less hiring. Tell that to
the folks in Silicon valley. They can't hire enough people fast enough.
Imagine two Silicon Valleys that were identical in all respects (ceteris paribus) except one had a law preventing noncompetes and one did not. There would be higher demand for labor in the latter. (But rockstar employees would likely be able to negotiate it out in any environment with high labor demand.)
It's not obvious that they're wrong - non-competes may well have the same sort of effect as restrictions on firing, and it's pretty clear that they reduce hiring.
Note that non-competes directly reduce the supply. Their effect on demand is second order.
My concern and issue with non-competes (and yes my contract includes non-competes) is that they are anti-competitive tool. By not allowing companies to compete for a labour they end up seeing the market value of the labour priced lower than it would otherwise be. Now should you wish to keep non-competes then there should be a clause that requires the automatic re-negotiation of re-numeration and benefits as the market price for the employee is obviously higher than what is being provided by the company.
My other main issue with non-competes is that they also become an excuse for the company not to deal with employee or morale issues. Without the freedom of movement there is no penalty for a company in not addressing those issues. The fastest and most painful wake up call is for several key employees to leave.
If non-competes are kept I would limit their use to companies of certain size and/or revenue. I don't think they make sense once a company gets past a certain revenue/size for them to be able to use non-competes.
Fred
That is by establishing a temporary monopoly over the use of an asset (for IP a patent lasting 20 years; for labour markets a non-compete of say 6-12 months) you provide organisations the necessary incentive and protection to innovate, take risks and create value.
In a world without non-competes then I think these companies and star employees would both have less capacity to create value and consequently be worth less so it is a symbiotic relationship.
I would add that I think the use of non-competes is most justified for founders and/or senior employees where they hold a material equity/options stake.
Following the analogy of IP, then there should be a legal quid pro quo for a company to use non-competes so that some thought does go into their use. For non-competes, I would suggest a legal requirement to pay either on the employees current salary with a penalty rate to reflect the loss of (usually) higher salary that the employee is suffering due to the non-compete. The Austrian legal requirement of null when the employee is fired is also a good idea I think.
I don't think that non-competes are the best method for dealing with cases where the employee has walked off with the contacts DB or similar trade secret. I can understand why they are used that way as they allow the information to "rot" and therefore decrease the value of the information or secret.
My main concern still remains the depression of market price for the persons' labour. I understand Fred's concern as an investor but essentially by enforcing non-competes his portfolio companies are not paying market price for that person's labour. Even though Fred's protfolio companies are paying the person to be the Twelfth Man (http://en.wikipedia.org/wiki/The_Twelfth_Man) they are paying him at the current salary and not the person's market rate. None of the arguments seen about keeping non-competes address the issue of requiring payment of market price for the person's labour.
On the front end, this noncompete clause seemed to be a lot easier for new employees to accept when they reviewed the employment agreement we asked them to sign. On the back end, the clause paid off on several occasions when employees actually left to go to work for a competitor: It gave us a vehicle to work with the new employer to protect our interests without having to battle it out in litigation. And in some cases the resulting professional working relationship between the companies' GCs paid off later when other potential disputes arose.
fred
All kidding aside, that is how I think about it too
fred
As an investor, I think that you have a responsibility to secure such protection for your company as long as the courts allow it and it doesn't put you in a weak position for recruiting. Backing off from that may go against your responsibilities to your investors and to the company.
Thanks mike
fred
I agree with non-competes in concept, but my experience has been that they are unenforceable from the perspective of denying a person the right to work in their field and make a living. This may be unique to a smaller player, but legal wrangling usually boils down to common sense when you get in front of an arbitrator or judge. That said, I would think that payment for a period without employment may be enforceable. But denying anyone the right to work and to opportunity is an uphill battle.
Notwithstanding the above, I agree with the concept in of non-competes theory.
Term sheets, as Mr. Wilson knows. are very different animals and much more complex. often being accompanied by key person riders and E&O underwriting policies.
It's all very messy; you can't (even in MA) stop someone from using their experience, but you can try to stop the misappropriation of actual IP. None of this is ever easy.
I usually agree with you, but on this one I think you're wrong. I've been working on a research project for nearly a year now, and as a part of it, went through a tremendous amount of research on the impact of non-competes. There is fairly compelling research (mostly done in the past ten years) on the differences in economic growth among tech companies in Boston vs. Silicon Valley -- and the *key* factor that shows why N. Cal succeeded where Boston petered out was the existence of non-competes.
It's almost scary how strong the evidence is concerning how important the lack of non-competes is... I've been meaning to write up a more detailed look at the issue, and this may convince me to get my act together to do so...
In the meantime, it actually makes for a really strong parallel to questions about DRM. DRM restrictions don't work and tend to only hold back the recording industry. Non-competes are effectively DRM on employees. They don't do what they're supposed to do and then end up only restricting what people want to do and what's necessary to grow a market. Both seems to make sense in the short-term for a company trying to block what others are doing, but in the long term, both are dangerous strategies that limit the potential of a market.
Mike
Fred
Working on a post to put on Techdirt that highlights & discusses much of the research... hope to finish it tonight or tomorrow morning...
Mike
1. Non-Competes are only allowed if you earn a more than 2150 Euro gross per month, so they try to allow that only for higher ranking staff.
2. Non-Competes can only be enforced if an employee leaves the company on his own. If the company fires or lays off an employee, no non-compete will work.
I think that these rules are good. Non-Competes shouldn't work for the normal employees and also not, if the employee is fired. If a company fires an employee and he choses to work for a competitor after that, the company should have no possibility to hinder them from doing so.
If the employee is so valuable, he shouldn't have been fired in the first place.
All and all, I think they lend more to litigation and increased opportunity cost than they do to protecting a company's assets. When all is said and done, if that star employee is leaving because of money, you have bigger problems.
the hardest part of your excellent plan to have corporations share the burden of a non-compete agreement would be getting them to agree to it!
I like it, sure, but how many companies would be willing to put their money where their mouths are? I mean, what's in if for them if they have to pay an employee to not work?
Anthony
Once again I must agree with you. I have to say that as a long time ago, low level employee of a compny called "Guest Informant" (long before they were bought by Lin, long before more, and long before our tech age), I made a move to replace some of the markets the company was dropping due to lagging sales, with my own books, and was hit right in the face with the "legal team". I was not going to take any market share that the company had not already given up, but who knows where it may have gone.
The line is fine for sure, and I don't mean to press the point, but old media/ new media is not a fluid transition. As we endure this rocky road however, some of the old rules of business will always apply.
What I would like to see are the stats.
Who (not names, just stats) have either of your firms incured losses (had defectors) directly related to violations of the clause?
http://www.bootstrapper.com/blog.php?bid=115
There are 2 situations for NDA's. Between strategic partners and employees. For strategic partner/investors it is useless. My attitude is if i can't tell you my idea and out-execute you then i shouldn't be doing it. Between employees it is good so people don't steal clients and leave.
"Not yet", I replied, "There may be code patents on the eventual mechanism that serializes the virtual dispatcher threads, but today;s technology patents for software innovations are in a state of great turmoil." I continued, "Often, it is the execution of the concept that survives long after the first patent fights are won and lost."