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Non-compete agreements?

Hi all,

I was recently asked by a company (which shall remain nameless) if I would be willing to sign a non-compete agreement. Now, I know the State of California where I reside has laws forbidding most forms of such an agreement, but I'd like to put those aside for the purposes of this discussion. Let's pretend that we lived in a state or country that would enforce such an agreement.

Would you -- as an employee -- be willing to sign such an agreement as a condition of employment?

Would you -- as an employer, and if it were enforceable -- ask potential employees to sign a non-compete agreement?

I'm curious what other founders out there think about these sorts of agreements. It's the first time I've ever been asked to sign one, and I've never even thought about asking a potential employee for it.

19 Replies

Jake Carlson
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Jake Carlson Entrepreneur • Advisor
Software Development Manager at Oracle
Yes and yes. The issue for me isn't really whether competition is ok -- I think it is. But unfortunately as a result of the employee's work at a company, he/she knows trade secrets that can be used against the company, giving the new company an unfair advantage over the original company. Same goes for the employee starting his/her own business. It really depends on the type of business, but in most cases I think a non-compete with a definitive end date is pretty reasonable IMO if only to prevent the type of unfair / unethical discloser of trade secrets, contacts, etc.

In other threads I've railed against overly restrictive contracts regarding the ownership and use of code. IMO the issue isn't so much the code itself per se; it's how a company's bottom line can be damaged by the code if it is used to compete against it in some way. I suppose the same argument can be made for other company assets, like sales contacts etc. It doesn't hurt a company for a former employee to use his/her rolodex to sell unrelated products / services; it's only when that rolodex is used to compete with the company that it harms the company. So I'm all about looser restrictions on the assets and stricter restrictions on the actual competition.
Dimitry Rotstein
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Dimitry Rotstein Entrepreneur
Head of R&D at SafeZone
Yes, I would (and have, both ways), providing such an agreement expires a few months after the employment is terminated. Anyway, speaking from an employer's side, I'm not really worried about a potential competition from a former employee. The chances that an ex-employee a) decides to make a competing product, AND b) succeeds at it, AND c) becomes a real threat, are so small that such a threat is negligible compared to the plethora of real threats. Not to mention the fact that enforcing a non-compete agreement is a big problem too.
Karl Schulmeisters
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Karl Schulmeisters Entrepreneur
CTO ClearRoadmap

I have and will again, sign non-compete's in the future. BUT as an employee, I make sure that they do not preclude my ability to work after leaving. I have done things like modify some of the text, initial it and sign it and return it as such.

Invariably they get accepted - though I suspect no one double checks anything but my signature so its possible they are accepting my changes via ignorance.

Which leads into the second part of the non-compete discussion: What is Fair?

as Jake points out, these employees potentially have "trade" and "business" secrets. At the same time such trade and business secrets often have a shelf life as well as a scope of impact. A developer who is working on your core engine - should be bound mostly by a Non Disclosure Agreement. Thus any "non-compete" needs to be fairly short time limited (3-6 mos)

OTOH someone responsible for a product line will know not only where the weaknesses are in your product line, but also your business strategy. And they can work for a competitor, fully honoring the NDA and yet still retarget the competitor's strategy at your weaknesses. Such a person should have a "non-compete" of anywhere between 1-3 years depending on level of seniority.

But remember, it should be a combination of non-compete AND NDA

Mark Lieberman
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Mark Lieberman Entrepreneur
Chief Startup Officer and Director, Advantage Accelerator at Oregon State University
Most states have limits on non-competes. As you clearly stated, a few states such as California, a non-compete is not worth the paper it is written upon. You are much better off with a good employee agreement that covers protection of intellectual property, trade secrets, duty of loyalty and other similar clauses. There are many good human resource documents on the Internet.
Karen Leventhal
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Karen Leventhal Entrepreneur
Founder & CEO at SE Rising
I was asked to sign a non compete recently. I declined initially, but eventually capitulated because it was a temporary job in an industry that I don't plan on staying. But the non compete stipulated that not only was I not able to share trade secrets (understandable) but I wasn't allowed to take any employment (even as a paper shredder) at a competing company. I understand that a former employee shouldn't disclose confidential information. But overall it seems to be that these agreements are essentially anti-free market and put together by companies that are afraid to compete on the strengths of their product alone. If your employee leaves and takes their rolodex with them and that hurts you a) you can also poach an employee from a competitor and get access to their rolodex, so it evens things out b) your product isn't strong enough to stand on it's own.

I maybe naive. Even when it comes to "trade secrets" I don't quite get it. As an entrepreneur, we are told over and over again, that ideas aren't worth the paper they are written on. It's the execution that counts. But when it comes to large companies that analogy is apparently no longer relevant. ??

In general, I think these contracts stifle creativity, and are often unethical.
Chris Oei
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Chris Oei Entrepreneur
Independent Contractor at Realty ONE Group
Thanks for the feedback, everyone. I'm a bit surprised, actually, that there wasn't more push-back against the concept of a non-compete agreement. I understand the need for confidentiality and keeping trade secrets away from competitors -- I've often signed NDAs and asked employees to sign NDAs -- but non-compete agreements feel to me like they're overly burdensome on the employee. If I ever moved to a state or country that enforced them, I kinda think I still wouldn't ask employees to sign one. The San Francisco Bay Area has birthed many successful startups without the burden of non-compete agreements, so from a macro perspective it seems to me they are of questionable benefit to the employer, and an obvious burden to the employee. It's possible that the cross-pollination of companies hiring each others employees actually helps everyone in the long run, assuming the employees transfer skills and ideas that aren't trade secrets.

In the particular case that spurred my original post, the scope of what constituted a "competitor" was I think very, very broad, which made the opportunity cost much, much greater than the amount I'd stand to gain from working with the company (which had not yet gained traction in any of the spaces it was calling "dibs" on). I suppose I could sign on the assumption that it wouldn't hold up in court, but I didn't want to go down that road. Oh well.

Food for thought, though.

Thanks again, all.
Gary Zatkovich
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Gary Zatkovich Advisor
Managing Partner, Zatkovich & Associates
Non-Compete contracts are nearly impossible to inforce. Most all states arereluctant torestrict anyone from "game fullemployment."
One exception would be if the employee owns, or hasequity/percentageof the company.
Jake Carlson
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Jake Carlson Entrepreneur • Advisor
Software Development Manager at Oracle
Ok, here's a simple exercise: anyone that thinks trade secrets should not have protection, I challenge you to publish all details of of what you're doing and how. That means which clients you are pursuing, what your bids are, all the details of your strategy, what your technology stack is, how you solved specific technology problems, etc.

You won't and you shouldn't. These kinds of details are what your business competitive and differentiates it from others. I think it's unethical for certain company knowledge assets to be intentionally divulged to competitors. I do agree that 'ideas are a dime a dozen,' but that refers more to the overall product / service you are selling. Entrepreneurs are told over and over that the idea is not worth much; that it's the execution that matters, and that's 100% true. But the 'ideas' (strategies and processes) that you specifically use to accomplish market dominance *ARE* in fact part of the execution (the work to make the overall idea come to fruition). In the same way, the specific code manifestations of concepts are execution. Not all 'ideas' are worthless. Inventions, true innovations, and novel strategies are the building blocks of a successful business. But yes, the initial concept of the business usually can't be / shouldn't be a closely guarded secret. So I'd caution against confusing the two.

I do sympathize with those with very specialized industry knowledge being confronted with non-compete contracts. It is a real issue for them as they are potentially signing away large swathes of their experience to not be used in the industry in the future. Perhaps I'm fortunate in that as my role as software engineer, industry knowledge is less important than system knowledge. In other words, I can more or less seamlessly move from industry to industry and take with me the knowledge I gained in solving certain types of problems, and can implement those ideas in other industries without competing with the companies where I concocted the idea.

So it is a bit unfair of me to impose my standards with regards to non-compete contracts on others. But for me personally, I'm happy to sign non-competes so long as they are not overly broad with regards to who a 'competitor' is. For example, I am working on a social network for a specific demographic right now. I would never sign a non-compete that prohibits me from working on another social network, but I *would* sign one that prohibits me from working on a social network for that specific niche within a certain timeframe. I think it would be unethical for me to use the information specific to the demographic to directly compete with the original company. But a social network for another demographic is absolutely fair game and I would fight tooth and nail any effort to restrict my future involvement in such endeavors.


Karen Leventhal
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Karen Leventhal Entrepreneur
Founder & CEO at SE Rising
Jake- I think specificity in the non compete is important. I've been presented with ones that were incredibly broad. "Competitor" was not even defined.

I agree with not spilling important secrets for a period of time. But I don't get not be able to take employment. I'm not a software developer, I am more on the business development end, where typically you get your next job on the very basis of what contacts you've developed and content expertise you've gained at the previous job. If someone offers you better money or a better working environment, then you should be able to go. In the end, if you able to steal all of your clients away from the former employer, then it either means you are well worth the extra money or the other product might not be that strong. On the hand, it's up to you as a person who will remain in a certain industry, how many bridges you want to burn.

Chris Oei
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Chris Oei Entrepreneur
Independent Contractor at Realty ONE Group
In the particular case that I saw, it appears as though I and everyone I hire would be barred from working at LinkedIn, Facebook, GitHub, Twitter, Skype, Dropbox, and a large percentage of my former clients and employers. I imagine that if a company like Amazon had such a broad agreement, all their employees would not be able to get a job anywhere else. But these are specifics with one particular non-compete clause, and not the general concept of non-compete clauses.

Jake, I agree with the overall concept of keeping trade secrets secret. Personally, for now, I'd prefer to use mechanisms other than non-compete clauses to do that. Still, the fact that most of the people who replied to this thread don't have problems with the overall concept of non-compete clauses means something, and so I think I ought to take a closer look at the issue.
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