By Bijan Sabet, a general partner at Spark Capital who also blogs at 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.