Employee Non-Compete Agreements: Stifling Innovation
On Thursday I went to a panel sponsored by the Harvard Berkman center on the effect of non-compete agreements on the high-tech business in Massachusetts. Unlike California, where such covenants are illegal, in Massachusetts they are both enforceable and quite commonplace. The consensus of the panel was that these restrictions are bad for the economy and whatever small benefit they may have for a company seeking to retain its employees is more than offset by the difficulty that same company will have in recruiting. Prof. Lee Fleming of the Harvard Business School presented some research which showed that non-competes reduce employee mobility by 20 to 30 percent and Paul Maeder of Highland Capital Partners put forth a model that showed how this could reduce the formation of new companies and the growth and innovation they could have provided. Bijan Sabet of Spark Capital added that his firm discourages companies in its portfolio from demanding non-competes. Maeder does the same for companies where he sits on the board, but so far has not persuaded his partners, or colleagues in neighboring firms, to take the same stance. Rich Miner added that Google, which is headquartered in California does not require non-competes from its Massachusetts employees.
WIth all this agreement on the negative effects of non-competes, the mystery is why they persist. The panelists were not optimistic that the Massachusetts legislature would change the law, since there was not a powerful constituency lobbying for change but there were large employers in the state who like things as they are. More likely the change would come as newly educated employees weigh job offers in Massachusetts and California and refuse to work at companies that want them to sign. Also enlightened VCs such as Maeder and Sabet stated they would continue to lobby their collegues at other firms.
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