Non-Competes: Is your startup built of promise or fear

Bijan of Spark Capital took a stand last weekend that he will no longer require portfolio companies to have non-competive agreeements for their management. Since then Fred Wilson, Techdirt, Fein, and others have also chimed in on their thoughts. This morning I spoke with a reporter from the Boston Globe about the issue, and I wanted to paraphrase here what I said to her.

Non-Competitive agreements are pretty much a standard for a lot of companies, and I hear two arguments most frequently for why they are necessary:

1) it could do real damage to your ability to grow if a key employee defects to a competitor
2) that most of the problems with non-competes come from them being crafted badly/not narrowly enough.

The first point is pretty easy to destroy as an argument. In California, non-competes are unenforceable. So we have a clear test case to see whether it does damage. I don't think anyone can point to Silicon Valley and say that entrepreneurship isn't working there, or that it has hindered the growth of huge companies like HP, Apple, or Google.

It is, of course, not the primary reason that the Valley dominates the rest of the country in start-ups, those are cultural reasons. But non-competes absolutely help engender the wrong kind of culture. I don't think Boston is not Silicon Valley because of non-competes, but they are part of a culture of protectionism, and draconian business conservatism that should be fought every chance we can.

The second point, that it's really just some bad agreements that spoil

the bunch, I just don't buy. If you try to keep non-competes from being overly broad, you render them useless. That is because a startup will be many things over its lifespan. Is Google a search company, an advertising company, or an information management company? It has been each of those in its lifecycle, and is now all of those. Which one would you suppose to put in terms of an agreement? Don't we all know by now that startups change their spots a majority of the time? In an age of co-opetition and open APIs, the definition of competition is as fluid as ever.

At Conduit we recently were faced with bringing on someone who was from a company that was going through a transformation, possibly to becoming a competitor to us, but who knew what they were going to become? The person I wanted to hire had some inside knowledge on the new direction of the company, but could not and should not share it because he was bound by a non-disclosure agreement (which I wholeheartedly support). What might have felt like no competition to me might have felt like direct competition to the CEO of that company because of his current view of the business did not match the public perception.

In situations like this, the material impact to a start-up is thousands of dollars in lawyer bills, delaying or passing on a hire while trying to figure it out, and a general fear of litigation no matter what anyone says. Think about how many times that happens every month across across all startups, and you start to understand the anchor that is dragging every startup outside of California. They all end up delaying good hires, and spending good money on lawyer fees, for something that doesn't actually seem to be necessary for the best startup ecosystem in existence to thrive.

Yes, that means as a CEO I run the risk of one of my employees defecting to a major competitor.  And I'd love to hear more direct examples of either side of this issue. But, in the end I would rather mitigate this risk by positive means rather than agreements crafted from negativity. I would rather focus relentlessly on building a good company, a good culture, incenting my team properly, and working on wonderful products. That is the positive way to keep your team cohesive. Succumbing to building agreements based on fear is a bad bargain.

UPDATE: The Boston Globe has an article on the issue, and there will be some petitioning of the Governor to get the laws of Massachusetts adjusted.