Very interesting to get an investor’s perspective on non-compete clauses, since technically, a non-compete clause is there to protect company stakeholders from unfair competition. They key term is actually not competition, but unfair competition, in that a former employee exploits confidential information to unfairly gain an edge over a former employer with regards to a business operation’s scope and territory over a given time period. If it sounds like I know a thing or two about non-competes, it’s because unfortunately - and unfairly - I do.
Spark Capital VC Bijan Sabet argues that non-competes should join 8-tracks and dinosaurs:
At the end of the day, the non-compete clause is a significant barrier to startups and innovation. I believe it significantly hurts business in the state of Massachusetts and other states that have not followed California on this issue. I’ve heard from many successful entrepreneurs that haven’t started a new company in this state because of their non-compete. Some have actually moved to California because of this.
To be clear, I do firmly believe in maintaining strict non-disclosure agreements and confidentiality with regards to trade secrets and intellectual property. Those are essential and should considered completely differently from non-competes.
Readers of this blog and personal friends and business acquaintances know that I know all too much about non-competes. I won’t comment on that right here, right now, maybe down the road - oh say about 60 days, and depending on my mood - I will… and if and when I do, I will make sure that some folks get their due and are exposed for the lack of ethics and honesty they displayed in the past. Of course, maybe I’ll be the bigger man once again and let bygones be bygones…
Anyway, the reason I agree with killing non-competition agreements is that those who seek to enforce it really could care less about unfair competition, employee/employer rights or protecting the investment of investors, they use it because of personal animosity, jealousy, envy or as a means to cover their own shortcomings.
After all, for an investor to come out and say that non-competes should be killed, it suggests that it’s because company founders - those eccentric and overly emotional and usually delusional folks (yes, irony is I am one now myself at WatchMojo.com) - push for them at the expense of new employees’ rights. But, by doing so, they make it harder for VCs to lure new staff and add legal costs for nothing.
Indeed, usually the one who seeks to enforce the non-compete is a large company that has deeper pockets, and with company founders and executives with bigger (read more bruised) egos. In other words, they won’t care about the merits of a case, but will pursue to enforce a non-compete to make an example of someone.
That is nonsense and unfair, and that is why non-competes have no place in business.
My philosophy on this is simple:
- as a former executive who played a major part in building a company from scratch and left to start a new company in a distinct sector, if my new company scares you or you wish you had thought of it yourself, then compete with me in the business world and marketplace; if you instead seek to bully me in the court of law, then you leave no choice for me but to destroy you in the court of public opinion.
- as a company founder: I will never ask employees to sign a non-competition. Instead, I’ll try to get employees - be it intrapreneurs or entrepreneurs - to build their dreams within the company I started and they now have joined to build.
The argument Mr. Sabet should be stressing to employers and employees, frankly, is to be honest in your intentions and dealings and to avoid working with dishonest, petty and borderline insane individuals whom cannot maintain civil relationships with anyone they work with, be it business or personal acquaintances.
For example, I once worked for someone who was particularly good at pissing on every one and destroying every relationship he ever touched. We were partners, and within 3 months of me leaving the company, he proved to be an SOB. Not just any SOB, a lying and deceitful one.
That same trait, frankly, extended to partnerships with our clients. At any time in the initial phases of client affairs, there were moments where the relationships could have ended because the advertiser wasn’t getting a good bang for the buck.
When we would reach those crossroads, I would consult with my boss but rarely take his recommendation. Had I listened to his advice, trust me, the relationship would have ended, acrimoniously, and the lifetime value of the relationship would be a fraction of what it could be, and ultimately went on to become due to a path of diplomacy.
But on the spot, my reluctance to take his suggestion would bruise his ego. By following my instinct and relying on common business sense, those very same relationships with a handful of clients ended up accounting for about 25% of the total revenues we generated during my tenure as VP of Sales. Those were the revenues that drove value in our company.
It’s not that I was right, it’s that the client is right… but by putting my clients’ wishes ahead of those of my boss, I pissed off a spineless, unethical and immature person and paid for it subsequent to my departure.
Ultimately, by giving an immature, inexperienced and dishonest person the right to use non-competes as a way to settle a score or compensate for a shortcoming, VCs ultimately pay far more than what they stand to gain from non-competition clauses. For this reason, when I think of Bijan’s argument and apply my own experiences to the matter at hand, I’m not surprised to see more and more investors wanting to scrap them altogether.
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December 2nd, 2007 at 5:55 pm
“folks get their due and are exposed for the lack of ethics and honesty they displayed in the past. Of course, maybe I’ll be the bigger man”
Please don’t be the bigger man, your readers want details!!!
December 2nd, 2007 at 6:09 pm
Deva, too funny… clearly you are a more recent reader…
We shall see how I’m feeling in about 60 days.