Startups Thrive on Competition, Not Non-Competes

10/9/13

It’s time to stop pretending that people are DVDs. It’s time to get rid of employee non-competes.

A DVD is a simple piece of plastic that only has value because someone (often a company) filled it with useful information, like a movie or a computer program. A blank DVD isn’t very valuable, but a DVD with a blockbuster movie is worth quite a bit.

When is a person like a DVD? When she is forced to sign a non-compete agreement as a condition of employment.

A non-compete (in case you’ve never seen one) is an agreement that says that you won’t work for a company that competes with your employer for some period of time, generally one to two years. They’re often combined with a confidentiality agreement, which says that you won’t reveal any of the secrets you learned. Non-compete agreements are unfair to the employee, harmful to startups, and unnecessary to protect intellectual property. They’re bad business, but as long as everyone else is doing it companies go along. We as a society should put a stop to them.

Some states like California (home of Google, Facebook, Yahoo, etc.) have made non-competes unenforceable, and it doesn’t appear to have done companies there any harm. It certainly isn’t bad for startups, as Silicon Valley consistently ranks #1 in terms of new companies funded. And it doesn’t appear to scare off large companies—53 of the Fortune 500 call that state home. So why do non-competes still exist?

Big companies like to use non-competes to scare off potential competitors—especially startups. That’s a little unfair—big companies also use them in court battles with other big companies too. But where non-competes hurt society is when they hamstring startups trying to grow.

I’ve worked at four startups in my career, and I can tell you that non-competes are a factor in hiring decisions. I’ve been part of hiring close to one thousand people across the four companies. Some of the roles we were hiring for required industry expertise. In those cases we sometimes hired someone from “the industry”—someone who had worked at one of the big companies in the space. We didn’t hire this person because they worked at Big Company, we hired them because they knew the industry and were a great fit for us. In many cases Big Company wasn’t even really a competitor.

But more than once the employee in question received a threatening letter from Big Company’s lawyers, warning the person that he was at risk of violating his non-compete agreement. The employee would call us up and say, essentially, “what the heck?” And now we’re both worried—the employee is worried about getting sued, or being out of a job (since he already quit his job at Big Company). And we’re worried about losing a great employee, and also about being sued.

“But companies get sued all the time,” you point out. True, but startups can’t afford to engage in legal battles that aren’t life and death—a lawsuit is a huge distraction for a company that is struggling to create a new product and a new market. Lawsuits over an employee are hard to justify. We would probably win the suit, but we’d still have the cost and distraction of the battle—so maybe we should just let that person go and save ourselves the trouble. Maybe we should avoid hiring people with experience in the industry. Maybe we should grow a little slower and lower our goals.

And that’s how non-competes kill innovation and growth.

“But we need to protect our intellectual property,” the big companies will protest. And I agree—remember that employees who sign non-competes generally also sign confidentiality agreements. Those agreements cover the genuinely confidential information that employees learn. That knowledge should not be available to other companies.

But general business knowledge, experience in the industry? That’s not confidential. And when a company tries to prevent employees from taking that sort of knowledge to other companies, they are confusing the employee—the “key asset” that they claim to value so highly—with a DVD, a cheap piece of plastic with no real value other than the information a company puts into it.

Fortunately, the Patrick administration has recently voiced support for making non-competes unenforceable in Massachusetts. So I urge people all over the state: Let your legislators know that you are not a DVD and you would like the right to work for whatever company you please. Urge them to end the enforceability of non-competes in Massachusetts.

Rob is currently VP Sales & Marketing at GrabCAD, having held executive roles at previous startups FreeMarkets, Kiva Systems, and Backupify. Follow @

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  • myPOV

    This is a fairly weak one sided argument that alleges the world is made up of purely start-up technology companies. Protecting a companies IP or “play book” is crucial to the survival of any company. No one person has to sign a non compete, rather it is done voluntarily in exchange for something of great value (employment). When signed otherwise or under duress it is not enforceable. I wonder how the author would feel if his top marketer or engineer left for greener pasture at an established CAD company and attempted to rip off functionality and features in GrabCad?

    Good companies and management focus on culture. If you really want to compete go ahead and allocate some of those start-up funds to defending a non-compete for someone you hired away from a competitor. It is up to business to take such risks or not take them. Rallying potential employees to rethink signing a non compete or backing away from a hire with a non compete is not very sporting or good business. What you preach may bite you in the end when you need to protect your own IP or “game plan”.

    Start-up business is like war, you have to be strategic and take risk that do not “sink your battleship” before you run out money or make profit. Moaning about non competes is like complaining about your enemy using bigger and better bullets on the battlefield. You will loose everytime time.

    btw: I am not an attorney just someone that thinks beyond my own 4 walls.

    • Kevin Johnson

      my POV, you wrote:
      > Protecting a companies IP or “play book” is crucial to the survival of any company.

      However, as the article states:
      > remember that employees who sign non-competes generally also sign confidentiality agreements.

      Non-competes can prevent employees from going to work for any often unspecified “competitor”, whether they left their job voluntarily or not. This makes Massachusetts workers less mobile than California workers, making Massachusetts less competitive.

    • BC

      Take your thought process about business being like war a little farther. I can hire an employee with relevant industry experience in CA, no problem. I can’t hire a similar person in MA without risk of a lawsuit. Guess which office I pick to slot my new position?

      I can start my new company in CA and recruit anyone who is talented and interested, no problem. I can’t do the same in MA without the risk of wasting money and time on legal bills. Guess which state I pick to start my new company in?

      In CA when companies under stress shed employees, those employees sign on to jobs that can leverage their expertise as quickly as possible. In MA they sit on the sidelines until someone is gives them a chance in a domain in which they don’t have experience – this is very rare in times of economic stress. This policy reduces our income tax revenues, increases unemployment costs and makes our companies less competitive than the ones in CA that can quickly pick up employees with relevant experience.

      With our current non-compete laws MA has come to a gun fight armed with a knife.

  • Jessica Parsley

    I had to sign a non-compete once in the natural products industry. It said to me “Look, there’s a good chance you won’t like working for us — but don’t even think about leaving and going with a competitor.” Sure enough, that ended up being the case. If I see one again, I’ll run!

  • Goro

    You don’t need a non-compete agreement to protect trade secrets and intellectual property. We currently have laws in place that already do that. Non-competes are used 99.999% of the time to prevent an employee from leaving a company. That’s a fact.

  • Orly Lobel

    I like the stories, and I am a big supporter of the ban. thanks for the article!
    The research shows that these intution are right on the money – california has benefited from its non-compete policy and boston and other places suffered a brain drain:
    http://www.amazon.com/Talent-Wants-Be-Free-Should/dp/0300166273