New Momentum to Limit Noncompetes in Massachusetts?

One of my partners, Jeff Quillen, recently brought to my attention an interesting discussion about non-competes that took place last month at a meeting of the 12×12 group.  As explained here, 12×12 was formed earlier this year in an effort to drive the company formation process in Massachusetts. It consists of “12 world-class CEO’s and 12 senior partners from some of the most active VC firms in town to launch 12 new companies in the next 12 months – and in so doing, launch the career of 12 next generation great entrepreneurs.” Since it was formed, 12×12 has raised $11.5 million and funded five new companies. The group meets regularly along with an Organizing Committee comprised of thought leaders such as Desh Deshpandi (Sycamore Networks, A123 Systems), Steve Vinter (Google in Cambridge), Paul Sagan (Akamai) and Jonathan Kraft (New England Patriots), and sponsors such as Foley Hoag.   (My partner Jeff Quillen is one of the regular participants.)

As described in the blog of Michael Greeley of Flybridge Capital Partners, at a 12×12 meeting last month, the group:

engaged in a surprisingly spirited debate concerning the impact of “non competes” in Massachusetts. After frankly more discussion than I imagined the common ground seemed to be coalescing around the need to soften or do away with non competes. 

Jeff reports that a number of the venture capitalists in the room observed that one of the impediments to creating new, successful companies is finding capable, hard-charging entrepreneurs who have experience in a particular industry to take on a lead role in a newly-funded startup. In California, the VCs will find these people in the senior management team (typically not the CEO) of an existing company in the industry; i.e. a competitor. Non-competes present no obstacle to this approach, because California law decrees that they are unlawful. In Massachusetts, in contrast, because of the prevalence of non-competes particularly among senior people at technology companies, the VCs are forced to look for senior talent outside the relevant industry or to hire graduate students with little or no experience. This phenomenon seems to be leading to a growing recognition (at least among the 12×12 meeting participants) that non-competes in and of themselves may be a significant impediment to creating and growing new companies in Massachusetts. Some in the room were postulating that perhaps Massachusetts should follow the California model. The group is going to study the issue and continue its discussions.  If the VC community in Massachusetts solidifies a stance against the status quo, it will find itself at odds with some of the larger, established companies (within and outside the technology community) that have resisted any change in the status quo.

I cannot help but observe a certain irony here given the current status of non-compete reform efforts in the Massachusetts legislature, as described in my previous posts over the past two or three years. The legislation initially filed in the spring of 2009 would have followed the California model and abolished non-competes except in very limited circumstances. The sponsors of that approach quickly concluded that there was insufficient support in the business community.  They then pursued a compromise approach, whereby noncompetes would remain enforceable but various protections would be established to protect against employer overreaching. The compromise bill (which has been revised in minor ways since its introduction) did not gain passage during the last session but is expected to be re-introduced this year. The irony — in my view — is that even if the compromise legislation were passed in its current or similar form, it is likely that the people 12×12 are hoping to recruit for its new companies still would be subject to non-compete restrictions that would impede their hire.

Ultimately, if significant players in the VC and technology communities conclude that noncompetes truly are an impediment to their ability to form and nurture meaningful new technology companies in Massachusetts, they will need to more forcefully express that view in public — to the Governor, their legislators, industry groups etc. — before the legislative ship has sailed.

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