Thursday, April 14, 2011

Non-compete debate renewed: bootstrapped companies vs. VCs

By Galen Moore

With noncompete legislation back for another go-round on Beacon Hill, a group of bootstrapped high-tech companies is looking to throw a wrench in the progress of the Boston venture capital industry’s darling political cause.

At least two revised bills are in process, with an aim to limit employers’ ability to lock employees into long-term non-competition agreements. Les Bowen, CEO of Materials Systems Inc., said he believes VCs would love to do away with non-competes, and pick off executives whose heads contain proprietary information. His 30-person Littleton company makes sonar and other acoustic components for the U.S. Navy, oil and gas companies, and others. Hard-to-patent business methods are its main competitive advantage, Bowen said.

“I am sure that some (VCs) would love to be able to get access to those technologies and the people who know about them,” he said.

In the past, the non-compete debate has been framed as small start-ups against large technology companies that use the agreements to lock up talented workers, stifling innovation in places where they are legal, such as Massachusetts. Non-competes are not enforceable in California.

EMC Corp. (NYSE: EMC) and Akamai Technologies (Nasdaq: AKAM) are frequently used as examples. But Bowen is a board member at the Smaller Business Association of New England (SBANE). SBANE represents companies in all industries, and many of its technology industry members are companies like Bowen’s. The organization has launched a lobbying campaign, writing letters to legislators arguing in favor of non-competes, saying legislation to limit the agreements is “anti-business.”

Non-compete advocate and Boston venture capitalist Bijan Sabet disagrees and thinks Bowen and SBANE are misguiding their efforts. Sabet, a Spark Capital general partner who has long supported outlawing non-competes altogether, said businesses like Materials Systems have an effective tool in non-disclosure agreements (NDAs), which allow employees to jump ship, as long as they don’t share proprietary information.

NDAs are used by companies big and small, and don’t stifle innovation, Sabet said. “He’s...putting the responsibility on the employee to take the company to court for breaking a ridiculous non-compete, but he doesn’t want the company to have the same responsibility over an important NDA,” Sabet wrote in an email.

However, non-disclosure agreements can be just as contentious as non-competes, said State Rep. Lori Ehrlich (D-Marblehead), who is lead sponsor on a new version of the non-compete bill. She noted that in states such as California, where non-competes are not enforceable, litigation shifts to non-disclosure agreements.

Ehrlich said there is a legitimate business interest in both non-competes and non-disclosure agreements, in so far as they are used only to protect customer lists, product launch plans, and other proprietary information. What’s needed, she said, is law that codifies judicial precedent.

“I’ve seen (non-compete) agreements that go out four years,” she said. “To tell somebody they can’t work for four years in their field is outside what is reasonable.”

Small businesses don’t have the resources to litigate either, said SBANE board member M.L. Mackey, CEO and co-founder of Beacon Interactive Systems, a bootstrapped software company in Cambridge – and non-competes aren’t always draconian, or controversial. “There is a very practical and reasonable approach to non-competes,” she said. Using non-competes that way is essential for small businesses that don’t have the wherewithal to litigate, any more than employees do. “There’s so many small businesses that just don’t have the resources to manage against people taking ideas,” she said.