Dec 3 2007 by Jason

Should Venture-backed Companies Require Non-Competes?

Today’s great post(s) are from Fred Wilson and Bijan Sabet regarding the usage of non-compete clauses for employees of venture-backed startups.  Specifically Bijan argues that non-competes should be eliminated and Fred argues that they should not, if properly paid for.

It’s an interesting debate, but one that I side with Fred on.  Having spent the past 10 years in California, I can confirm that they are not enforceable, but I cannot say that their lack of enforceability has had a positive effect on startup activity in the Bay Area.  In fact, I’ve seen several times where the absence of a non-compete has led to litigation between two companies, which is much more costly than not having one at all.

I think Fred’s most important point is that “non-competes need to be paid for” and that they need to be drafted reasonably.

This debate is one of a number of issues that is highly flammable when debating, but that I have a hard time finding how not having non-competes is in the best interests of a particular company. I’d equate this to a drag-along on departing founder’s stock, in that if one looks at the issue on a personal level, it can appear egregious, but the end result is better for the company as a whole.  And what is better for the company, as a whole, may or may not be better for that particular individual when all is said and done. 

Either way, kudos to Bijan and Fred for starting what should be a great discussion of ideas.