Bijan Sabet Says Cross Out Those Non-Compete Clauses
xconomy.com, December 03, 2007
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 that it’s been in these so called standard agreements for a long time. Big companies and small companies use them in New England and other states too.
WR: By removing the requirement, do you think that’s enough to prompt your portfolio companies to end the practice? What about cases where there are other investors that do still have the requirement?
Bijan: We are going to encourage our companies to drop the non-compete clause. Many of them already do not include them – certainly the ones in California. In cases where we have co-investors we will do our best to encourage them to drop the non-compete clause. That is the best we can do right now.
WR: What are the biggest problems with non-compete agreements, from your point of view, and how could doing away with them help with innovation and economic growth in Massachusetts and New England?
Bijan: I wrote a blog post about this. It’s a big deal in my view. One way to consider this point is by looking at California. If you look at California, there are a lot of startups created from alumni of successful and unsuccessful companies. Many of these entrepreneurs came from companies that we would call competitors to their new thing. How many people are at Google that used to work at Yahoo? How many folks are at Apple that used to work at Microsoft? Where did the earliest Apple employees come from? How about founders of Intel?
Non-competes in the state of Massachusetts means that our startups have one arm tied behind their back. Massachusetts entrepreneurs can’t leave and start any company they want. They can’t just think about changing the world. They have to think about possible legal risks. This is a real barrier and obstacle.
WR: Do you have any specific examples in mind where non-compete agreements prevented something cool from developing?
Bijan: Absolutely. Often when a large company buys a startup – [which is] very typical in the state of Massachusetts – the acquisition may or may not work. Often the entrepreneur still loves the market or vision that they originally pursued. So now after a suboptimal acquisition, what should those employees do? Stay at the new company that isn’t executing? Leave and do something completely different? Or should they use all of their intelligence, creativity, and ambition and try to build something new and big?
WR: Can you describe the discussion you had within Spark leading up to this decision? Was it seen as a “no-brainer,” or was there some serious discussion of the pros and cons? What were they, both for Spark and for your portfolio companies?
Bijan: I certainly discussed it with my partners quite a bit. We felt strongly about this but we wanted to talk to some folks as well before making this a firm decision. We spoke to several legal experts and we talked to some very successful local entrepreneurs. With all of this in mind, we felt determined to move ahead.
WR: Non-compete clauses are often a standard part of existing contracts for new employees or contractors. It will take a while for the lawyers to rewrite all those contracts. Meanwhile, what would you encourage employees/employers to do – simply cross out those sections before they sign contracts?
Bijan: Yes. Cross them out.
WR: Have you talked with a lot of other VC folks who share your view? Are you optimistic that other New England venture firms will follow Spark’s example?
Bijan: I’ve talked to some individual VCs that agree but they need to spend some more time talking to their entire partnership. Some other VCs may take a longer to support this either publicly or privately. And so I didn’t want to wait to get consensus with other investors before we put a stake in the ground.
Ultimately I’m very optimistic. It’s the right thing to do for everyone. It will create new ideas, foster innovation and create new companies—all on a level playing field. It will help large companies stay focused. It will help VCs. It will help entrepreneurs.
I hope that other VCs, founders and CEOs support this effort. It’s time to think long term about these things.
[via Xconomy]
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