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Summary:

Every day, venture capitalists like me see the chilling effect that employer non-compete agreements have on innovation. Employer non-compete agreements are literally handcuffs, and we need to ask whether their impediments to innovation serve a greater good by protecting employers’ legitimate rights.

By Bijan Sabet, a general partner at Spark Capital who also blogs at http://www.bijansabet.com.

Every day, venture capitalists like me see the chilling effect that employer non-compete agreements have on innovation. In dozens of states, the most brilliant contributors are locked out of joining new opportunities in their field of expertise for a year, sometimes even longer.

Promising startups are dead in the water to investors if there’s a hint of non-compete trouble in the mix. This is not a trivial matter: The vitality of a region’s economy — and ultimately the country — is driven by the ability to bring new ideas to market, faster. Non-competes put the brakes on innovation and job creation, and the effects are felt far beyond the VC community.

Silicon Valley represents America’s model of innovation. Because employee non-compete clauses are not enforceable in California, workers are free to pursue new ideas and opportunities, and the employer’s legitimate intellectual property rights are still protected by non-disclosure agreements (NDAs) and non-solicitation agreements (NSAs).

Yet Massachusetts, New York and Michigan are among dozens of other states that still enforce non-compete clauses. This isn’t just a philosophical debate. We have just to look to Michigan in 1985, when it made non-compete agreements enforceable again after 80 years. The result: Overall job mobility was immediately cut by 20 percent. In specialized technical fields, the damage was even more acute.

Employer non-compete agreements are literally handcuffs. We need to ask whether their impediments to innovation serve a greater good by protecting employers’ legitimate rights.

As a founder of the Alliance for Open Competition, I argue that the answer is no. Employers’ intellectual property rights are protected by NDAs. Critical customer relationships are protected by NSAs. The purpose of the non-compete is nothing other than to insulate the employer from legitimate competition downstream, restraining free market forces.

The non-compete makes the employee the company’s property for the term of the agreement, which typically extends far past the employee’s last day on the job. It essentially makes the claim that “Because you’re highly skilled, you belong to us even after you don’t work for us any more.”

This puts employees who choose to leave in an outrageous situation. They were paid during the term of their employment for work performed. Since they have left the company, they are no longer being paid. Yet the company still asserts a right of ownership of them as workers, simply because they used to pay them.

And as a result, too many bright minds are forced to sit on the sidelines rather than use their skills to bring new ideas to market.

To enhance America’s competitiveness in the global marketplace, we should start by simply making non-compete agreements unenforceable, except in the most limited of situations.

My firm is doing its part by eliminating non-compete agreements among our portfolio companies. You can join the movement at the Alliance for Open Competition. We would love to hear from you.

  1. I agree with you – this is absolutely critical for innovation. Great post.

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  2. Also, non-compete really doesn’t jive with the philosophy of Right-To-Work laws–though it’s more commonly applied to forced unionization/strikes, the same fundamental right is violated.

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  3. [...] ¿Cuándo te convertiste en la propiedad intelectual de alguien más? [...]

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  4. While I agree that these non-compete agreements have negative effects, I disagree on the solution. While never stated explicitly, the implication of the article is that more states should stop enforcing these contracts. I don’t see why the government should get involved at all, one way or another. If you simply publicize this practice, that should be good enough. Have your organization spend a little bit of money and create a simple website which lists every company that regularly utilizes these agreements. This would be much simpler and easier than running to the state governments to change their laws, a process that takes years, not to mention the fact that non-compete agreements shouldn’t be a subject of law/regulation anyway. If your “brilliant” techies cannot even google their future employer for information like this before signing a contract, they get what they deserve.

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  5. [...] Does your employer own you? Seriously. Bijan Sabet penned a fantastic guest post over at GigaOm. Recommended. (tags: non-compete nda employment) [...]

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  6. [...] from an article entitled, “When Did You Become Someone Else’s Intellectual Property?” by Bijan Sabet, a general partner at Spark Capital: Silicon Valley represents America’s [...]

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  7. I disagree with the notion that non competes create ownership of an employee past when she has been paid. Employees use non competes as a bargaining chip for higher salary/start/stay bonuses and therefore consideration has been given by the company to the employee ahead of an employees ending date. No one is getting their rights trampled on.

    Venture investing is such a self serving boondoggle that VC’s are not likely to find any sympathy on this matter. Why not pay your fair share of income taxes before complaining about an unfair world?

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  8. Ajay suggests that it’s due to lack of research that causes technies to end up signing non-competes. From my limited experience in MA, that’s not how it works; one knows before accepting an offer that a non-compete will be required.

    The difficulty is finding a job (at least, a job in a startup) that doesn’t come with an obligatory non-compete.

    I suppose if we ALL developed some guts and refused the job because of the non-compete, the tide might turn. But as far as I can tell from a very limited sample, the non-compete is unavoidable.

    Hence I’m on the side of declaring these ridiculous documents to be unenforceable.

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  9. Looking at another dimension: non-competes wouldn’t be so bad if they weren’t so damn vague. Today, non-competes could prevent you from going into vaguely-related work simply because your last employer has some interest in expanding into that domain. If contracts were more specific, especially down to naming specific competitors that you can’t work for, it’d make a lot more sense. (Remember that Asian dude who went Microsoft-to-Google? That was not cool)

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  10. “[E]mployee non-compete clauses are not enforceable in California”

    This is an exaggeration. Section 16600 does not prevent contractual limitation on the type of business someone does, as long as the business area is narrowly defined, reasonably limited by time or geography, and the contractual provision was clear and explicitly agreed to by the employee.

    You can’t prevent someone from working at all in his or her profession, but you can mutually agree that the employee will not directly compete in your specific market niche for a bit of time after leaving your company.

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