This article was written with Geoff Mamlet.

Today, some of our legislators will hold a hearing at the State House to discuss changes in Massachusetts’ non-compete laws. They would do well to heed our own past as an open employment state.

In the mid-1780s, Samuel Slater was a young apprentice in England working for the men who created the world’s first mass production system: a system which produced thread from cotton. At the time, Britain was intent on protecting its technology, and it was illegal for British citizens to emigrate and take with them the knowledge of British technology. See http://en.wikipedia.org/wiki/Samuel_Slater.

The American textile industry was desperate for a way to compete against the British. They offered a bounty of $100 to people willing to import British technical knowledge. “For which man will bring us English models, will be given monetary funds for his reward.”

Slater, at the end of his apprenticeship, emigrated to the US, taking with him his knowledge of the British mill technology. Arriving in Beverly, Massachusetts, Slater used his skill to build there the first cotton mill in America. He went on to produce numerous improvements to the British designs.

The innovations introduced by Slater are recognized as having kicked off the industrial revolution in America, and he became known as its father. By 1810, there were 50 mills spinning cotton into yarn or thread. By 1815, there were 140 mills within 30 miles of Providence alone, with 26,000 people on the payroll.

The freedom Slater had in Massachusetts to practice his trade, despite restrictions elsewhere, made our region the center of a technology boom that changed the world.

We would like to leave our legislators with this thought: today’s Massachusetts non-compete law does not prevent a young person from following in Slater’s footsteps. It merely encourages that young person to do so in California. Surely this is short-sighted.

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Gregory Bialecki is Massachusetts Governor Deval Patrick’s Secretary of Housing and Economic Development, and leads an ungainly collection of agencies charged with everything from promoting affordable housing in Massachusetts to attracting international business investment to the state. Here at Xconomy, we cross paths with Bialecki quite a bit, since he’s also responsible for many of the state’s initiatives to support high-tech innovation and greater collaboration between business, academia, and government.

I interviewed Bialecki at length last week, and in Part One of our conversation, published yesterday, I asked him how his work as an attorney specializing in real estate development and land-use permitting related to his current business-development role for the state. We also talked about the roles state government can play in promoting innovation. Bialecki said the Patrick Administration has spent much of the past two years simply helping players in various technology sectors to recognize that when it comes to working with business, state government can play a supportive rather than an adversarial role.

In particular, we were talking as Part One closed about the state’s obligation to help business by improving the quality of science, technology, engineering, and math education for young people. In this second half of the interview, I pressed him for more examples of things state government can do to accelerate innovation. And we went on to talk about the need for more funding to move ideas from the lab bench to early-stage commercialization, the debate over non-compete agreements in employment contracts, and the Administration’s progress drafting new business regulations on protecting consumer data.

Xconomy: I think it’s pretty easy for everyone to agree on the importance of science and engineering education. But what are some of the other parts of this innovation agenda—things that maybe are not so easy to agree on?

Secretary Bialecki: There are other aspects of the innovation ecosystem, if you will, where I think we can play a partnering role. When it comes to thinking up great ideas, Massachusetts is fantastic. But when it comes to converting those good ideas into commercial products and services, we need to do a better job. The way to do that is a collaboration between business and academia and government to look systematically at the ways we do that. In other words, what great ideas are behind the university walls right now that aren’t coming out? When I describe the state government [as] having a partnering role, in many cases it’s as simple as being a convenor or facilitator. So, for example, the Governor, who is very interested in innovation, has the capacity to say to all of the public and private universities, “Can we get together and compare notes and talk about how we are commercializing our ideas? Who has the best practices and are there things we can learn from each other? Are there things the state can do to make public universities better at it?”

That’s one of the things we are focused on—learning from universities and businesses the ways we can make these connections better and literally get good ideas out of the lab and into …Next Page »

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If you’ve seen from the inside how technology startups get created and funded, you know that law firms are involved at every step in the process. But to outside observers, it might be surprising just how central a role the attorneys can play—not just by helping entrepreneurs with incorporation papers and the other legal rigmarole of starting a business, but by connecting them with the right venture capital firms and making sure investments are structured fairly for both the founders and the venture funds. And while nobody likes to pay legal fees, a good outside attorney can literally save a company when things start to go south: an experienced firm can help straighten out founder-investor conflicts or line up emergency financing, for example.

Given that Boston was the birthplace of venture financing, it’s probably not surprising that it’s also home to a large group of law firms specializing in company creation and financing. Indeed, you can’t go far in the startup world without bumping into names like Cooley Godward Kronish, Edwards Angels Palmer & Dodge, Foley Hoag, Foley and Lardner, Goodwin Procter, Mintz Levin, Proskauer Rose, Ropes & Gray, Nutter, and Wilmer Hale (see tables on this page and page 4). Several of these firms are home to former partners from Testa Hurwitz, the Boston firm that more or less invented the modern corporate technology practice; Testa launched and represented scores of Boston-area startups, venture capital funds, and technology giants between its founding in 1973 and its dissolution in 2005.

Last week I sat down with Tom Burton and Lewis Geffen, two attorneys from the corporate practice at Mintz Levin’s Boston office, to hear more about how law firms fit into the local innovation ecosystem. Founded here in 1933 by Herman Mintz, Benjamin Levin, and Haskell Cohn—three Harvard Law School graduates turned away by Boston’s white-shoe firms because they were Jewish—Mintz Levin now has nearly 500 attorneys, making it Massachusetts’ fourth-largest law firm. It has long represented Biogen Idec—one of the first big biotechnology success stories—and was intimately involved in AOL’s acquisition of Time Warner in 2000. The firm also has major operations in San Diego. And under Burton’s direction, it has developed a booming practice representing clients in the energy and clean technology sectors on both coasts. Many of the firm’ clients turn up regularly in these pages, including EnerNOC, Greatpoint Energy, FloDesign Wind Turbine, General Catalyst, and Rockport Capital.

At Mintz Levin’s office near San Diego’s Carmel Valley, partner Carl Kukkonen tells Bruce, “We represent a lot of small, pre-funded venture-backed companies as well as multi-nationals.” Kukkonen, who was among the lawyers to open the San Diego office in 2006, adds, “I like to tell people I was working with solar, fuel cell, and battery companies before I ever heard of the term ‘cleantech.’”

From Mintz Levin’s 43rd-floor conference room at One Financial Center in Boston, one can peer down on the Federal Reserve building, the Custom House Tower, and every downtown landmark. It’s a far cry from the brick warehouse district of Kendall Square where we scribes at Xconomy spend most of our time—but the visit was an interesting reminder, for me, of all the high-level networking, negotiation, advice, and other homework that goes into getting a technology startup off the ground.

In my interview with Burton and Geffen, portions of which are transcribed below, we covered everything from the state of the cleantech industry and the challenges of working for both startups and venture funds to non-compete agreements and that old chestnut, the difference between East Coast and West Coast investing cultures.

Xconomy: Explain to me how Mintz Levin wound up developing an energy and cleantech practice.

Tom Burton: One thing that’s interesting about Mintz is the entrepreneurial nature of the firm itself, and the way it moves into markets that other firms haven’t placed a bet on. I was pitched that back when I joined the firm in 1996, and I chose Mintz over a lot of safer bets like the Skadden Arpses of the world.

Lewis Geffen: At Sherman and Sterling in New York, where I spent my first five years, no one ever thinks “I have to produce business somehow.” At Ropes & Gray or Wilmer Hale, new associates are simply given work. Whereas we teach “business development 101″ to our associates. It’s part of our fabric here.

TB: For me, all I knew was that I wanted to build something that hadn’t been built before. I wasn’t sure what it was going to be, but I trusted in the firm’s pitch, and took advantage of some luck. When I was a second-year associate, I brought in my first client, who …Next Page »

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[Updated with extensive comments---see pages 2 and 3] In a message posted yesterday on his “Mass Innovation” blog, Massachusetts Secretary of Housing and Economic Development Gregory Bialecki says the case for outlawing noncompete clauses in employment contracts in the state is not yet “sufficiently proven” for Governor Deval Patrick’s administration to throw its weight behind proposals to ban or modify them.

It’s the first time a member of the Patrick Administration has come down on either side of the noncompete debate, which has been heating up in business, investment, and legislative circles over the past year.

In past comments, Governor Patrick himself has said that his administration has no particular stake in preserving existing Massachusetts law, which allows employers to make new workers promise they won’t switch to competing companies or start their own competing businesses for a year or more after they depart. Critics of the practice argue that it retards innovation, and that states where courts don’t enforce such clauses, such as California, have an economic advantage over Massachusetts.

In his post, Bialecki says the Administration is “aware of the arguments in favor of changing our current situation,” including the California example, academic studies showing that noncompete clauses slow entrepreneurial activity, and arguments lodged by local business and investment leaders such as Tim Rowe of the Cambridge Innovation Center and Bijan Sabet of Spark Capital. (Rowe, Sabet, and State Representative Will Brownsberger have all shared their reactions to Bialecki’s post with Xconomy; see below.) Bialecki calls a change in the law around noncompetes a “potentially intriguing” way to support innovation in the state.

However, the post also lists seven reasons for leaving the current law around noncompetes intact. To boil them down: change would be disruptive; many technology industry insiders are against it; even some small startup executives and venture capital partners favor the clauses; employees harmed by noncompete agreements are often the victims of “unreasonable or overzealous abuses”; it would be better to wait for economic recovery to make such a change; and the market might correct the problem on its own, “if companies that don’t require non-competes make a big deal of this issue and thereby recruit talent more successfully than those that do.”

Bialeck concludes: “On balance, we don’t yet see the case to have been sufficiently proven that a change in our existing laws will be a significant improvement to our innovation ecosystem. But we will continue to keep on top of the debate.”

In remarks yesterday at Microsoft’s New England Research and Development Center, Massachusetts Attorney General Martha Coakley (an elected official who is not appointed by the governor) appeared to take a somewhat more favorable stance toward …Next Page »

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[Editor's Note: Bijan Sabet of Spark Capital has kindly allowed us to cross-post this entry from his blog reacting to news today of a draft bill proposing compromise language on noncompete agreements in Massachusetts.]

My partners and I have been pushing to end the use of employee non-compete agreements for some time now.

We passionately believe in this issue and back in late 2007 I wrote that we should end these non-compete agreements. We planned on starting with our firm and then encourage our portfolio companies, entrepreneurs and other VCs to end this practice as well.

A few months later I wrote a guest post on GigaOm and also we started the Alliance For Open Competition. The idea was to start a grass roots effort to get rid of these things (n.b. we believe in protecting employers through the use of non-disclosure agreements, non-solicitation agreements and intellectual property governed by patent law). We were thankful that in a relatively short period of time prominent investors and entrepreneurs joined the cause and started speaking up.

Recently the Boston Globe Sunday Editorial took on this issue in their column—”Clause For Concern.”

I was pleased earlier this year when I was contacted by Rep. Brownsberger who was leading an effort for reform on this issue. Rep. Brownsberger and a team created House Bill 1794 which as originally drafted would give employees and employers the same protections that exist in California. I participated in a few sessions and was thrilled with the leadership of this bill. As a result our firm, Spark Capital formally endorsed this bill. I have huge respect and admiration for Representative Brownsberger.

Sometime over the last week or so that bill was modified significantly. The revised draft is on Rep. Brownsberger’s website. In our view, the revised changes won’t solve the problem in our humble opinion because they simply don’t go far enough to reform and create real change.

Here’s the principle changes they made last week:

1. Employees who make under $50k are free of non-competes. If you make more than that you are subject to a non-compete.

2. The revised draft requires that employers give advance notice that they will require non-competes in their offer letter.

3. Punish overreaching by employers by awarding attorney fees to the employee whenever an agreement is reformed or found unenforceable.

* * *

My reaction:

1. I don’t understand or agree with this new threshold of $50k/year. It will leave out plenty of entrepreneurs and employees.

2. The advance notice doesn’t help if every Massachusetts company requires non-competes.

3. Point #3 puts a huge risk on the entrepreneur/employee on the expense front. Who wants to fund a lawsuit? Even if it’s frivolous. Legal fees are expensive and they create a …Next Page »

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A new draft bill that would limit but not outlaw noncompete agreements in employment contracts in Massachusetts is being floated by two members of the state’s House of Representatives.

The bill combines elements of separate bills introduced earlier this year by Representatives William Brownsberger of the 24th Middlesex district and Lori Ehrlich of the 8th Essex district. Brownsberger told Xconomy this morning that the new bill is intended in part to head off objections among business leaders to his earlier bill, which would have outlawed noncompete agreements altogether.

Many employers in the state believe that noncompete agreements are needed to keep employees from leaving with company secrets and starting directly competitive businesses. Some venture capitalists and technology executives, on the other hand, argue that the agreements punish budding entrepreneurs and harm the local economy, by forcing employees either to stay with their current companies and forego starting new ventures, or to abandon Massachusetts for places like California, where noncompete agreements are unenforceable.

The compromise bill, which adopts much of the language in Ehrlich’s first bill, will likely be heard by the House Committee on Labor and Workforce Development this fall. Unlike Brownsberger’s original proposal, it allows companies to require workers to sign noncompete agreements as a condition of employment. But it creates incentives for employers to limit the terms of these agreements to 6 months, down from the 12 months in typical employment contracts today. It also cuts out restrictions that judges in contract dispute cases might see as overreaching—and it automatically awards attorneys’ fees to employees in such cases.

For employees who make less than $100,000 a year but more than $50,000, the bill limits the acceptable rationale for enforcing noncompete agreements to just two: protecting trade secrets or confidential information. And for employees who make under $50,000 a year, the bill makes noncompete agreements unenforceable for any reason.

At this point, Brownsberger’s earlier blanket proposal to outlaw noncompete agreements—a proposal endorsed by a coalition of venture capital partners, company executives, and industry associations—would seem to be dead in the water. But the new proposal would still bring significant changes to Massachusetts employment law, and probably has a much greater chance of surviving the coming legislative debate.

“We got a very positive response [to the earlier bill] from the VC community and from employees who had had bad experiences, but we got a very negative response, particularly from smaller businesses and many of the smaller high-tech companies,” Brownsberger says. “Companies are very emotional about this issue and feel very strongly that we were taking away from them protections that are vital to their survivability. So we listened carefully to those concerns and attempted to craft a bill that would improve the venture climate, provide employees with some real relief from overreaching noncompete agreements, yet at the same time allow businesses—particularly small businesses—to protect what they feel is vital to their survival.”

The Brownsberger-Ehrlich bill appeases employers by preserving most of the existing legal levers available to them when enforcing noncompete agreements in court. A noncompete agreement should be seen as valid, the bill says, whenever it’s needed to protect an employer’s trade secrets, confidential information such as product development plans and marketing strategies, or “goodwill,” meaning customer relationships.

But there are exceptions in the bill: the goodwill argument can’t be applied to employees making under $100,000, and employees making under $50,000 are exempted altogether. To keep employers from imposing draconian terms, the bill would award attorney’s fees to employees in any cases where a judge finds that the employer has overreached. And the bill explicitly scraps a legal argument sometimes used to keep ex-employees from going to work for competing companies, even in the absence of a signed noncompete agreement: the “inevitable disclosure doctrine,” under which courts presumed that any departing employee would betray trade secrets.

“What we’ve done in the final legislation is give employers very strong incentives to draft only the most reasonable noncompete agreements,” says Brownsberger, who represents a district including Belmont, north Cambridge, and east Arlington. What’s considered reasonable? The bill spells that out, too: “Number one, they can be no more than 6 months in duration,” Brownsberger says. “Number two, …Next Page »

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The directors of Foundry Group, a Boulder, CO-based venture firm, have signed on as supporters of the Alliance for Open Competition, a group lobbying to outlaw the use of non-compete clauses in employment agreements in Massachusetts and other states.

The alliance, founded last year by partners at Boston’s Spark Capital, argues that the non-compete clauses imposed by many Massachusetts employers stifle innovation by preventing entrepreneurs with good ideas from setting up new businesses that might be seen as competing with those of their former employers. Such agreements are unenforceable in California—a fact that may aggravate brain drain from New England to the West Coast, in the view of many people active in the local entrepreneurial scene.

Today Foundry managing directors Brad Feld, Seth Levine, Jason Mendelson, and Ryan McIntyre added their names to the list of venture capital partners supporting the alliance. Spark partner Bijan Sabet announced the additions in a Twitter post today.

But why would a Colorado firm care about non-compete clauses in Massachusetts? I pinged both Sabet and Feld today for answers.

In an e-mail, Feld explained: “Since we invest all over the US (including MA) we are motivated both by MA specific reasons as well as our strongly held beliefs that broad-based non-compete agreements are inhibitors of innovation.”

And as Sabet pointed out, Feld is a founding member of TechStars, a Colorado-born startup incubator program that recently opened a Boston branch. “So he cares about this state,” Sabet said.

Here’s a rundown of all VC partners who have now joined the Alliance for Competition:

Bijan Sabet, General Partner, Spark Capital
Brad Feld, Managing Director, Foundry Group
Dennis Miller, General Partner, Spark Capital
Gwill York, General Partner, Lighthouse Capital Partners
Jeff Fagnan, General Partner, Atlas Venture
Michael Feinstein, Managing Director, Sempre Management
Michael Greeley, General Partner, Flybridge Capital Partners
Mike Tyrell, General Partner, Venrock
Jason Mendelson Managing Director, Foundry Group
Paul Conway, General Partner, Spark Capital
Paul Maeder, General Partner, Highland Capital
Ryan McIntyre, Managing Director, Foundry Group
Santo Politi, General Partner, Spark Capital
Seth Levine, Managing Director, Foundry Group
Todd Dagres, General Partner, Spark Capital

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Boston’s Spark Capital came out publicly today in favor of Massachusetts House Bill 1794, which would outlaw non-compete agreements in employment contracts in the state. The venture firm has been vocal on the issue for some time—its partners helped found the Alliance for Open Competition and sent Governor Deval Patrick an open letter opposing non-compete clauses in 2007—so it’s no surprise to see Spark backing the new bill, filed by State Representative Will Brownsberger in January.

The bill, which we wrote about on December 16 and January 12, is co-sponsored by State Senator Patricia Jehlen. It would void any part of an employment contract that restricts an employee’s ability to seek work after they’ve left their employer. The bill’s backers—and now Spark—say that such clauses, which are extensively used in the technology industry to keep employees from setting up competing businesses or going to work for competitors, are bad for workers and bad for the state’s overall economy. They argue that in states such as California, where non-compete clauses are unenforceable, there’s more innovation because employees have more freedom to move between companies or start their own.

“As a Boston venture capital firm, we are always looking to propel innovation across the Commonwealth, and to strengthen Massachusetts’ global competitiveness,” Spark general partner Bijan Sabet said in a press announcement today. “Through several discussions and planning sessions with State Representative Brownsberger, it’s clear that employment non-competes are stifling the emergence of promising young companies in our state, forcing some of our most innovative entrepreneurs to leave in favor of more open corporate environments. The success of Silicon Valley, which does not legally enforce non-competes, is a prime example of how emerging startups are allowed to thrive.”

Most opponents of non-compete clauses say other mechanisms such as non-disclosure agreements and trade secrets protections are sufficient to keep employees from using a firm’s own intellectual property against it. The Brownsberger-Jehlen bill wouldn’t affect non-disclosure agreements, and Spark says it still supports them. But Spark stopped requiring its portfolio companies to impose non-compete agreements on their employees back in 2007.

Brownsberger’s bill was filed January 12. A hearing on the bill is expected to be scheduled this spring. A competing bill filed by State Representative Lori Ehrlich, House Bill 1799, would modify state law regarding non-compete clauses, but would not eliminate them; Ehrlich’s bill makes non-compete agreements unenforceable for employees whose yearly salary is below $100,000 and limits the term of the agreements for other employees to two years.

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Massachusetts Representative Will Brownsberger filed a bill today calling on the state legislature to outlaw the non-compete agreements that prevent many Massachusetts residents who leave their employers from finding work at similar companies.

The brief bill, entitled “An Act to Prohibit Restrictive Employment Covenents,” would amend Section 19 of Chapter 149 of the General Laws of Massachusetts, which deals with general employment provisions. It renders void and unenforceable “any written or oral contract or agreement arising out of an employment relationship that prohibits, impairs, restrains, restricts, or places any condition on, a person’s ability to seek, engage in or accept any type of employment or independent contractor work, for any period of time after an employment relationship has ended.” Violators would be liable for the affected employee’s attorney fees. (We’ve reproduced the full text of the bill on Page 2.)

I first wrote about the pending bill last month. Brownsberger, who represents the 24th Middlesex district, including parts of Belmont, Cambridge, and Arlington, said then that he’s primarily interested in helping service workers such as telephone agents, who often leave their positions only to find that the non-compete clauses in the employment agreements prohibit them from finding comparable positions in their industries. “I’m concerned that these agreements are often entered into by employees who are at a substantial bargaining disadvantage,” Brownsberger said.

But non-compete agreements are also the subject of debate in the entrepreneurial community. Critics such as Bijan Sabet, a general partner at Spark Capital in Boston, have said that they retard innovation and hurt Massachusetts startups relative to their rivals in states like California, where non-compete agreements are illegal.

In a recent blog post, Richard Tibbetts, a co-founder and software architect at Lexington, MA-based StreamBase Systems, called Brownsberger’s proposal “a simple legislative change which will cost the government little and have a big impact on Massachusetts competitiveness.” Tibbetts posted the text of a letter he wrote to his Congressional representative, Sean Garballey, urging him to support Brownsberger’s effort. The letter says in part:

In some cases, potential employees have declined to pursue discussions with me, fearing legal repercussions from their previous employer. In other cases, employees have requested that they not work with certain customers or on certain lines of business, in order to avoid the appearance of impropriety…While these agreements are seldom enforced, their existence and the legal grey areas surrounding them are a drain on our economy. They hurt workers, who are not able to change jobs freely and make use of their skills in the best jobs possible. And they hurt companies, making it harder to recruit the best employees. Removing noncompetes will help everyone in Massachusetts benefit more from our skilled workforce.

According to Tibbett’s post, Massachusetts Senator Patricia Jehlen plans to sponsor a Senate version of Brownsberg’s bill. Other legislators wishing to co-sponsor the anti-non-compete bill have until February 6 to add their names to the bill. The bill is expected to be referred to the House Committee on Labor and Workforce Development, which will likely hold a hearing on the proposal this spring, Brownsberger said last month.

Update, January 16, 2009: New blog posts applauding Brownsberger’s initiative have been published this week by Scott Kirsner of the Boston Globe and Angelo Santinelli of Dakin Management and North Bridge Venture Partners.
…Next Page »

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The recent downturn in the economy is having—and will continue to have—a significant impact on the ability of many companies to raise money and fund continued growth. This in turn will have significant ramifications on exit strategy. Luckily, for some at least, there are still potential buyers out there with sufficient cash to fund acquisitions. The Wall Street Journal, for example, reported that Oracle CEO Larry Ellison said at the company’s October shareholder meeting, “Acquisitions that we have been looking at for some time may now be more attractive.” As the current economic conditions are likely to move M&A towards a buyer’s market, potential targets should be asking themselves what they can do to make themselves more attractive and to make it easier for a buyer to close the deal.

Let’s face it—many smaller companies don’t spend a lot of time or resources getting their houses in order. They are focusing their primary efforts on R&D and marketing and sales, as they should. But if at some point a potential buyer is interested enough in your business to take a look at you, it would be in your best interest to be prepared as an organization. This includes the formalities related to the business’s legal existence and its relationships with other parties such as customers, vendors and employees.

At the top of the list are corporate organization documents (e.g., charter, bylaws and stock records), corporate administrative records (e.g., shareholder and board minutes and resolutions), contracts (of both the vendor and customer varieties), and employee and contractor agreements. A company has to ask itself: If a buyer knocked on the door tomorrow and wanted to start due diligence, could I find all of these documents? Are they up to date? Has everything been properly signed and dated?

The inability to produce these materials for due diligence could cause a buyer to worry about the state of the business. A lack of shareholder and board minutes books can call into question whether the company’s actions have been conducted with all necessary approvals. A buyer needs to be able to rely on the fact that all prior actions taken by the company or its officers were properly authorized. Without this knowledge, the buyer faces a risk that some prior actions could be challenged. For example, the buyer wants to be assured that critical material contracts have been properly handled.

Improperly maintained stock records prevent proper determination of the various ownership stakes in the company. A buyer needs to know exactly who owns what, which will ordinarily determine how the money is divvied up when the deal closes. Without this information, the buyer doesn’t really know what it is buying and runs a significant risk of becoming embroiled in an ownership dispute involving founders, investors and other stockholders.

Failure to organize properly signed contracts can have numerous ramifications. Do you have all necessary rights to the intellectual property used in your business? Do you own it? A careful review of your contracts with vendors and licensors will be necessary to make this determination.

The buyer will also want to verify that your employees and consultants have signed agreements confirming that the company owns (in the case of employees) or at minimum has sufficient license rights (in the case of contractors and licensors) to all intellectual property used in the business. If it takes a few weeks to find these documents and get them to the buyer’s due diligence team, the team may rightfully wonder whether you have a handle on things.

Demonstrating to a buyer that your company has adequate contracting practices for customer deals is equally important. Your (and eventually the buyer’s) ability to recognize revenue – and the timing of revenue recognition—will be highly dependent on the existence of properly signed and dated contracts. A serious buyer will very likely want …Next Page »

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Many Massachusetts companies require new employees to sign agreements saying that if they leave, they won’t go to work for a competitor for at least a year. The idea behind these non-compete agreements is to prevent a company’s competitors from gaining access to trade secrets and key personnel. But there’s a growing chorus of entrepreneurs, venture investors, labor-rights activists, and others saying that the agreements are unfair to employees. They not only make it harder for workers to switch jobs, the argument goes, but they retard innovation, and make Massachusetts a less attractive place to work than California, where a statute makes non-competes illegal and employees can switch employers and start new companies at will, as long as they respect traditional confidentiality agreements.

Now the debate is about to make its way anew to Beacon Hill. State Representative Will Brownsberger of Massachusetts’ 24th Middlesex district, which includes Belmont, north Cambridge, and east Arlington, says he plans to introduce a bill in the upcoming legislative session that would abolish non-compete agreements in the Bay State.

Brownsberger says he’s primarily interested in shielding average laborers from the effects of the agreements. Often, he says, these are low-level service workers such as telephone representatives who probably don’t have any valuable trade secrets, but are nonetheless prevented by the agreements from seeking other positions inside their industries. “I’m concerned that these agreements are often entered into by employees who are at a substantial bargaining disadvantage, and that they end up inhibiting those employees from making appropriate job changes,” Brownsberger told me yesterday.

But he says he also worries that non-compete agreements in Massachusetts may steer talented engineers and other innovators toward other states where they feel they will have more freedom to pursue their work. “I am concerned that these agreements in Massachusetts may be a barrier to recruitment of the best technology talent,” he says.

Brownsberger is drafting the bill—which he plans to file in the Massachusetts House of Representatives in mid-January—with help from employment lawyers and from Caroline Huang, a Belmont resident and speech scientist who has become active on the issue recently. “I’ve always felt it was unfair,” Huang says. “I approach this as a labor rights issue.” (Caroline Huang is the sister of Greg Huang, who is Xconomy’s Seattle editor.)

Huang says she first encountered a non-compete agreement back in 1990, when joining her first employer, Dragon Systems. (The maker of a well-known speech recognition system called NaturallySpeaking, Dragon was later acquired by Lernout & Hauspie, whose assets were eventually acquired by ScanSoft, which later changed its name to Nuance.) “It bothered me, because I was worried about getting my next job,” says Huang. “We are very specialized in my field, being speech scientists, and we need to work in speech. I signed it, but my recollection is that I felt very boxed in.”

And, in fact, the non-compete agreement came back to haunt her. After leaving her position at Dragon, Huang went without work for several months, then took a job at a text processing company rather than risk violating the agreement by looking for work with other speech companies. “The agreement seemed very broad, and I was in no mood to see where the limits were,” she says. “They were telling me that I could not work for a direct or indirect competitor, whether it was for compensation or not, in any business that competed with their current business, even with a business being planned. It was very hard to tell what was still in speech that would not have fallen under this.”

Much later—last fall, in fact—Huang says she began to notice that other people were talking and writing about the effects of non-compete agreements. One of these was Bijan Sabet, a general partner at Boston’s Spark Capital who believes the agreements hurt business in Massachusetts; a year ago, Sabet announced that Spark was dropping …Next Page »

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We got an interesting note this week from Bijan Sabet, a general partner at Boston’s Spark Capital who’s been on a campaign to get rid of non-compete agreements, the clauses in many employment contracts that prevent people who’ve left their jobs from engaging in similar businesses for a certain period. We interviewed Bijan on the subject back in December, and now he sends word that Spark and the Berkman Center for Internet & Society at Harvard Law School are organizing a debate on non-competes and how they affect the innovation economy in Massachusetts. Bijan’s note follows:

“My position on non-competes is pretty well-known: I don’t like them. I believe that innovation comes from interaction—and that for Massachusetts to thrive as a hub of innovation, we must follow Silicon Valley’s model where non-competes are not enforceable and entrepreneurs are free to innovate without fear of litigation.

“But I can also admit that the issue is not a simple, cut-and-dried no-brainer. That’s why my firm—Spark Capital—is teaming up with the Harvard Law’s Berkman Center for Internet & Society, for the upcoming panel discussion on the merits and drawbacks of non-competes—the contracts routinely used in Massachusetts (and many other states) by employers that force employees to sign away their rights to engage in any business of a competitive nature when they leave their present jobs.

“The Berkman Center’s Executive Director John Palfrey, a clinical professor of Law at Harvard Law School, will be moderating the discussion, which in addition to myself, will include Brightcove founder and CEO Jeremy Allaire, Akamai general counsel Melanie Haratunian, Harvard University associate professor Lee Fleming, and Highland Capital general partner Paul Maeder. That’s a good mix of opinions which should make for a lively and intelligent conversation.

“It’s an important topic. Ask anyone who isn’t free to accept an ideal job offer because of a non-compete. Or who essentially can’t work in their field of expertise at all for a year or two, since it’s so specialized that every company in the market segment is considered a competitor. Or, who has a great idea for a totally new business, but worries that the non-competes hammer will smash them if they try to make it real. (Those are the ones that we in the VC business come across most frequently.)

“Of course there are arguments for the other side as well: Have you heard about key members of a company’s engineering department leaving en masse to start at a new company? Or a talented employee who created an innovation only to leave his present job to bring that innovation to market? There are legitimate issues of protecting intellectual property and trade secrets at stake.

“If innovation is truly the engine of our ongoing economic growth and well-being—and I believe it is—then we need to take a hard look at this issue, and come with something better than what we have now.

“Here are the full details:

Employee Non-Compete Agreements: Protecting Innovation or Stifling It?

Thursday, June 19th, 3:00-7:00 pm 4:00-8:00 pm

Ames Courtroom, 2nd floor of Austin Hall, Harvard Law School

There will be a panel discussion, followed by a cocktail reception. Anyone is free to attend. You just have to register by June 12 (a week before the event) by emailing your name, title and company to Amar Ashar at the Berkman Center: ashar@cyber.law.harvard.edu.”

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The non-compete agreement. When people ponder the reasons for Silicon Valley’s surge as a startup haven—often leaving New England licking its wounds, as it did after student venture Facebook’s departure for Palo Alto, for example—they often point to the persistence of this little clause in many New England-area employment agreements as a major contributor.

The clauses are meant to prevent a company’s ex-employees from starting similar businesses that could undermine it in the marketplace. In California, courts have held that they’re unenforceable. In Massachusetts, they’re still quite common—and there’s widespread agreement that they hold back entrepreneurship. Yet many big companies favor the clauses, and years of lobbying to have them outlawed in the state have come to naught.

Now one Boston venture firm, Spark Capital, is taking matters into its own hands. Partner Bijan Sabet—who explains more in a Q&A with Xconomy below—announced on his personal blog Saturday that the company will no longer require the startups it invests in to put non-compete clauses into their contracts with employees.

“The non-compete clause is a significant barrier to startups and innovation,” Sabet wrote. “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.”

Sabet emphasized that he still believes that entrepreneurs should be forced to protect their former employers’ trade secrets and other intellectual property. Non-disclosure agreements “are essential and should considered completely differently from non-competes,” he writes.

But effective immediately, he said, Spark Capital will do away with non-compete clauses and will ask the founders, CEOs, and co-investors at the companies in its portfolio (several of which we’ve profiled, including Buzzwire and Bug Labs) to do the same.

In an interview today by e-mail, Sabet told me that he thinks Spark’s move will eventually motivate other New England venture firms to abandon non-compete language in their own contracts. But he says Spark moved now because it “didn’t want to wait to get consensus with other investors before we put a stake in the ground.” Here is the rest of our conversation:

WR: You said in your blog post that you “will not require a non-compete clause” with your portfolio companies and new investments. Was this formerly a requirement? What was the thinking behind it—and why, in general, do you think non-compete agreements are so common in New England?

Bijan: Oftentimes it was in there as “boilerplate” language. I don’t know the origins well enough, but I do know …Next Page »

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