June 6 2014
by Todd Hixon

Non-Competes: Hidden Hand-Cuffs For Entrepreneurs

[This post first appeared at on April 17, 2014.]

The non-compete issue is heating up again in Massachusetts, and none too soon. Enforceable non-compete agreements put Massachusetts start-ups at a big disadvantage to Silicon Valley. Non-compete law needs to get fixed here and in any other region that aspires to a world-class innovation ecosystem.

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This is a bit arcane, so let me explain. In Massachusetts and most other states, when an employee is hired by Company X, s/he is required as a condition of employment to sign a “non-compete” agreement that says something like: “I promise to not work for any company that competes with Company X for a period of (typically two) years after the end of my employment.” Usually “competes with” is defined broadly so that it covers, for example, offering products that Company X does not actually offer but which are related to its established products. Massachusetts law makes this agreement enforceable.

Non-compete agreements are not enforceable in California. Employers there can protect their intellectual property with patents, non-disclosure agreements, and assignment of invention agreements. The Uniform Trade Secrets Act prohibits employees from taking their employer’s intellectual property to another business. But employers cannot prevent their people from taking their energy, skills, and experience to a new company and growing a business there.

Consider this hypothetical. An employee of “Company H”, let’s call him Steve, becomes fascinated by a new product category bubbling up in the hacker community. Company H mostly sells scientific equipment and has begun to offer computers to its customers. The new product Steve envisions is a computer that is much simpler and much less expensive, really no competition for Company H’s products. And, its low price point might stimulate emergence of a much broader market. Steve takes his idea to his boss at Company H, who turns it down. I speculate the boss was thinking the new product is a toy [famous last words], it does not meet customer requirements, and if it were somehow successful it would put downward pressure on prices and hence erode margins for established product lines. Bad idea!

This story is not hypothetical, of course. Company H is Hewlett-Packard, the new product is a “personal computer”, and Steve’s last name was Jobs. This dynamic is a classic dilemma of big, successful technology companies, thoroughly analyzed in Clay Christiansen’s book, The Innovator’s Dilemma. A Massachusetts “Steve” would probably be out-of-luck (or move to California) because of a non-compete with his employer, and if he left to pursue his idea on his own, the employer could threaten to sue him. That often makes investors to stay away, because we fear the cost and uncertainty created by law suits.

Non-competes prevent people with ideas from accessing the resources and opportunities to develop those ideas. They favor established companies that are playing defense: working to protect established products and customer relationships. Voiding non-competes favors innovation: people with new ideas gathering resources to build and sell the new, new thing. If favors offense.

And, big companies can do well without non-competes. Many California companies, such as Intel and Hewlett-Packard, have grown to be juggernauts. Intel was a spin-off from a bigger company: Fairchild Semiconductor. The next generation of big California companies, Cisco, Google, Facebook, and the other Internet companies, have done even better. They live in symbiosis with start-ups: people spin out with ideas, prove the technology and the market, and then some of them are bought back in. The big companies are often the first customers for the start-ups. Big and small companies each contribute to a world-class ecosystem. Many people prosper (more).

It takes vision and time for this virtuous circle to work, however. The short-term pressures on the big companies cause them to fight to maintain enforceable non-competes, which help them solve today’s problem.

Those of us who work in the innovation ecosystem, and those who care about it, need to make the case for the benefit of a free market in talent: more innovation, more growth, stronger markets, and a stronger workforce from which small and big companies alike will benefit. In Massachusetts we are fortunate that Governor Patrick has chosen to champion this cause (more).

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