Making Connections, Managing Risk in Startup Deals: A Visit to Boston Law Firm Mintz Levin

8/25/09Follow @wroush

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ultimately pushed through, but if there are only one or two people willing to step up and finance the company, you have to find a way of getting that done.

X: I have to ask you a question about non-compete clauses in employment agreements. I assume your work for companies includes structuring employment agreements. Based on your experience, where do you come down on the argument that non-competes stifle innovation in Massachusetts? Opponents say they discourage employees from starting new companies here in the state, or worse, that they send innovators off to California, where non-competes aren’t enforced.

LG: It’s important to note that not just any non-compete will withstand the law. It’s got to be reasonable. Restricting a CFO or even a CEO is not necessarily the same as restricting a CTO or a chief scientific officer. So we will often give advice on the appropriate scope of a non-compete agreement.

My own view on the larger question you asked—particularly if you examine the differences between West Coast and East Coast culture, and ask whether the quote-unquote “absence” of non-competes on the West Coast explains the difference in company creation—is that there are a lot of other reasons for the difference. If there is a greater prevalence of broad non-compete agreements on the East Coast, it’s a minor factor in explaining the differences in company creation. And you should know that it’s not that there’s an absence of non-competes in California; they’re just a lot narrower.

TB: I would argue that the culture here creates the non-competes. It’s not the other way around. Our culture here on the East Coast being perhaps a little bit more careful and reserved, which by definition stifles innovation a little bit.

X: Mintz Levin has a big office in San Diego. Say a company came to you and was trying to decide whether to locate on the East Coast, where they might be closer to the technology talent, or on the West Coast, where they might find more interested and risk-taking investors. How would you advise them?

LG: It’s more complicated than that. You’ve got physical assets, you’ve got people, there are all sorts of considerations to where to locate a company. And West Coast investors don’t necessarily limit themselves to investing on the West Coast. I think where to locate a company is a separate question from picking investors. What’s really important these days, especially if you are going to need serious capital over the long term, maybe $40 or $50 or $80 million, is to decide whether you would rather have a syndicate of three or four investors, with the right mix, who can provide all of that capital, versus finding maybe one West Coast investor and take the risk that with your series B or C round you will have to go out and find new money. Building the right syndicate for the right company is a very detailed art. Deals, right now, don’t get done unless the right syndicate is built.

X: My impression is that East Coast venture firms are more interested in syndicating than West Coast firms. Does that jibe with what you see?

TB: I’ve been involved in four or five deals where the West Coast investors were adamant about taking the whole deal, and the East Coast guys wanted to do a syndicate, and the entrepreneur had to make a decision. It is definitely peculiar. In cleantech, the market is not regional—you might have technology based in Massachusetts, but your market might be in California or Germany. If you have a syndicate that covers both the East Coast and the West Coast, you can draw on the relationships in those areas. West Coast firms tend to have more going on in Asia. You think about who is going to provide you with access to the right kinds of players.

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • http://www.boston.com/innovation Scott Kirsner

    Wade –

    I always feel that when attorneys jabber on about non-compete agreements and how they are so essential to the culture here, they ought to disclose that attorneys are not subject to them. They’re free to leave Mintz today and go work at Nixon Peabody tomorrow. (This is part of the attorney’s code of conduct, not a state law…although Massachusetts law does exempt doctors, nurses, social workers, and, oddly, TV and radio broadcasters from being bound by non-compete agreements.)

    But while attorneys aren’t restricted by non-competes, they do get to bill plenty of hours representing plaintiffs and defendants in these cases.

    One reason you never hear attorneys arguing to change the status quo with regard to non-competes is that it works wonderfully — for them.

  • http://www.xconomy.com/author/wroush/ Wade Roush

    Scott, thanks for the comment. I see where you’re coming from, but I also think it’s too easy to cynically dismiss every note of resistance to the idea of non-compete reform as the product of rank self-interest.

    Also, I’m not even sure the self-interest argument holds much water in this case. It appears to me that Mintz and the other firms have more than enough work to keep them busy without having to represent clients in employment contract cases–witness the growth of Mintz’s practice in San Diego, and the long list of other successful California venture law firms like Wilson Sonsini.