Thursday, December 06, 2007

Non Compete Agreements- not such a good idea

Bijan Sabet, a general partner with Spark Capital, recently blogged about his belief that non-compete clauses for employee's is a bad idea. One key excerpt:
Can you imagine if employees agreed to a non-compete clause in California? Consider how many new companies would not have been created. How much value would be lost? It would be substantial.
Fred Wilson over at Union Square Ventures disagrees in this blog post. His premise is you should have non-compete clauses in employee contracts, but who a competitor is should be tightly defined. I would say 'good luck with that'.

I have some personal experience with this that has me coming down on the side of Mr. Sabet over Mr. Wilson.

In the mid-90's I was hired by a major Hollywood studio to work as the VP of technology for their interactive media branch in Palo Alto. Within 2 months of being hired, a large New York media company bought this studio and they decided to shut down the Palo Alto facility (gotta squeeze out those expenses to make that leverage buyout work ya know).

The NY company moved the executives to various positions within the company. It wasn't the best fit. Since we'd been hired to do a job that was technology based (largely around creating online media and interactive TV) and this NY company didn't really buy the premise, it was a mismatch to have us there. They gave us the option of taking jobs within the company or, as Fred says 'sitting on the beach', but not working for anyone else in our areas of expertise.

This, for a technology person, is death.

In my case, the employment contract was for 2 years. Since it was clearly defined (my 'area of expertise', i.e. use of technology in media) this meant that I would effectively be paid very well to lose my expertise in an industry that was going at warp speed just as the internet was forming (circa 1994/95).

Ack. Lousy situation. The NY company wouldn't budge on it either. I had to move to NYC and take a job with peers who went, daily, out for 'coffee and a lap dance' at 3pm to the strip joint 2 blocks down (this is not an exaggeration), or retire from working on things I'd been passionate about for close to 10 years just long enough to become hopelessly outdated and useless in my chosen profession.

What I ended up doing was putting together a plan that leveraged the internet in ways they hadn't thought of. I exploited the excel bug of the time: "if we can get 2% of the population to sign up, it's worth BILLIONS". Like everyone else at the time, they bought it and funded me for the remainder of my contract.

I was lucky. I managed to talk them into acting as a VC for an internet startup. I even got the Hollywood studio to back it so they promoted me to SVP, gave me an office in Hollywood and let me set up my operation wherever I wanted (I, of course, set it up in Boulder with offices across from the Walnut Brewery and only had to deal with the Hollywood guys during every other week trips out to CA for 'facetime' with the execs).

This kept me in the game, but it also kept me out of the startup world and in BigCo land for another 10 years. (path of least resistance). When big companies keep offering you big dollars and big titles with grand plans, it's hard to go another route without taking really big risks. I admit it, I was weak. It took until my 40's to get the balls to say no to the BigCo's offers and strike out on my own.

However, If I hadn't had that non-compete clause, I would have simply left and started a company in my 30's. The media companies would have had one more guy out there building something truly useful, tested by the market and something they could then BUY if they wanted it badly enough.

I only regret a few things in my life. One of my main regrets is that I waited so long to do what I should have been doing long ago. That non-compete clause was one of the mechanisms that kept me out of startup land. Not the only one (again, I was weak) but it put me on the path and made it alot easier to take that path of least resistance.

So, I agree with Mr. Sabet. Non-competes have no place in the startup world.


Anonymous said...

Scott, reading Fred's post it almost sounds like you agree with him. He's not in favour of sweeping non-competes. He's not in favour of non-competes for the entire employment term, etc.

To me, there are 2 non-competes. The "while you're working here" non-compete - which is basically "don't work for anyone else". Then there's the termination non-compete, which has to be more tightly defined, has to be geographically defined, has to be time limited to 3-6 months and has to be laser-focused ('internet media' isn't).

Under those circumstances, your Director of Sales can move to a non-competitive company as soon as he leaves. Or, she can sit on the bench for 6 months and then move over (because at that point any knowledge she has is effectively out of date).

Anonymous said...

I agree in part.
I think that non-competes make sense for sales people in some industries -- so that they can't build a book of clients for one company, then quit and steal that whole book of clients for another company before the company who supported the building of those relationships has a chance to introduce a new person. In those instances, the non-competes say that you can't contact our clients or any potential client about whom you gained knowledge while working for us, within a specific geographic region, for a specific (and reasonable) time. They cannot legally say "you can't sell this kind of commodity for two years".

However, in fields like technology development... they're unfair and unreasonable... and depending on the courts you're dealing with -- defeatable.
In the early 90's, I prosecuted, and redrafted to make more effective, several non-compete agreements in the sales area. They have a definite purpose -- but the last time I looked at the law, they always had geographical limitations to enforceability. (They could block you in your state, but not nationwide).
I'd have been interested to look at yours -- when you build 'em, you learn how to break 'em!

An excellent read from an ex-evangelical.

  As you know, I once was an evangelical megachurch pastor and my pastoral career stretched over many years. Eventually, I could no longer t...