Some Thoughts On Non-Competes

It was nice to see the news a few weeks ago that Massachusetts House Speaker Robert DeLeo vowed to put new limits on contracts that prevent employees from working for competitors. "Non-competes" that restrict the free movement of talent from one company to another can do real damage to an individual's livelihood and the economy at large. Many people believe that the reason that the explosion of successful tech companies happened in Silicon Valley is because of California's effective ban on employee non-competes. Allowing talent to flow to the best organizations without friction is good for a local economy.

Unfortunately, over the past several months I've seen lots of startups going in the opposite direction by including aggressive non-compete terms in employee agreements.

Many companies take it a step farther and require 'no-poaching' terms in their vendor contracts and even try to collude with other local startups and agree to not steal one another's employees.

I don't think companies fully understand the damage that's being done with these types of arrangements. Let me explain.

Imagine that you're working for a startup in Buffalo, New York (Buffalo actually has a pretty hot startup community by the way). And imagine that there are another 20 tech companies in Buffalo that, at some point, you could go work for -- you have the talent they need and you'd potentially like working for some of these companies. Then imagine that the startup you currently work for requires you to sign a non-compete as part of your employment contract. Then you learn that your company requires all of their vendors and customers and partners to sign an agreement that precludes them from poaching your company's employees.

As your company grows, the number of other companies that can demand your services around your home has dropped from 20 to, say, 12. Suddenly 40% of the companies that would potentially demand your services now can no longer demand your services. So the demand for your services has decreased 40%. You're now 40% less valuable than you used to be.

At a minimum, a company doing this to their employees is unethical. At its worst, it's illegal (Apple, Google, Intel and Adobe recently paid a $415 million fine for colluding on no-poaching efforts to suppress employee wages).

When a company creates an agreement where another company cannot poach its employees, they are artificially reducing the value of those employees and their ability to make a living.

Again, the spirt of this is understandable. Hiring and training employees is expensive and companies want to fight to keep their best people. But addressing employee churn through contracts is a backwards way of handling the problem.

The better (and harder) way of dealing with the problem is to create an environment where good employees feel valued and are being challenged and are working on difficult problems and are developing professionally and personally and are being compensated fairly. Writing contracts to compensate for shortcomings in these areas is cruel and likely very ineffective in the long term. And it's nice to see that the state of Massachusetts is catching on and pushing for legislation that will protect employees and the local economy.

The best way to keep employees loyal is to act in a way that deserves loyalty.