Post Category → Hiring

Non-Competes and Startups

TL;DR: Post-employment non-competes are generally not enforceable in California. Given how much content around tech entrepreneurship originates from California, you might get the impression that not having non-competes in startup employment agreements is the norm across the country. You’d be wrong.

The whole non-compete debate in tech circles is fun to watch. Certain people try to paint it in simplistic “good v. bad” terms. The champions of innovation who believe “talent should move freely,” v. the traditionalist ogres representing entrenched BigCo’s. But as you’ll hear me repeatedly say on this blog: watch incentives. Where you stand depends on where you sit. 

Ecosystem v. Individual Incentives

The debate over non-competes has a few core elements to it. First, it pits ecosystem v. individual incentives, which I’ve discussed in a few places on this blog. I’m fairly confident that if you remove the ability for employers and employees to agree (voluntarily) to have non-competes in their employment docs, the end-result is more companies and more bargaining power for employees (obviously); which is to say, it probably does net-out to faster ecosystem growth.

But if I’m an entrepreneur who has already started a company, I give far far more shits about the specific company I’ve sunk my sweat and tears into than about your “ecosystem.” Your ecosystem is not going to produce an ROI on my “one shot” investment.

However, if I’m a venture capitalist, angel investor, or run an accelerator, my ROI is tied to the ecosystem; I have portfolio, not “one shot” incentives. I benefit from incentivizing hyper-competition and the creation of new companies, even if it threatens the existence of those who are currently working on their “one shot.”

ps, it also increases the need for capital to fund talent wars. No non-competes -> Talent wars -> Demand for more capital -> VCs make more money. Watch incentives.

From an evolutionary perspective, you better believe it would help the human species if people died sooner and reproduced more. You also better believe the people currently alive might have a slightly different perspective on the matter, and would prefer for their own individual interests to be considered too.

So putting aside moralizing judgments, everyone discussing the non-compete issue needs to first acknowledge the reality of their misaligned incentives.

Grandstanding

Secondly, because so many people on the entrepreneurial/employer side, particularly in Silicon Valley (where there is an extremely^2 competitive labor market), are so concerned about being seen as “that awesome person/company that just LOVES employees and you really really really should want to work for,” there is very much a reluctance to speak honestly on this issue. You’ve got companies offering doggy daycare and daily massages to try to hold onto their roster. They sure as hell aren’t going to go on the record saying “yeah, it would be nice if we could have non-competes.”

So it doesn’t surprise me that most of the public content on the issue involves people grandstanding about the values of innovation, disruption, free talent flow, etc., and how they support outright bans on non-competes. The law (in California) is already there – they can’t have non-competes, and that’s not changing – so why on earth would I counter its logic publicly, when deviating from the script will hurt my recruiting efforts?

There’s a very similar dynamic going on here with the 90-day exercise period on employee options. Putting aside the legal and tax nuances around it, so much of the public content coming out of SV on it paints it as total BS and just a way for employers to “screw” employees.

Summary:

  1. Asking employees to commit to a 1-year non-compete is just employers “screwing” employees. Nothing more.
  2. Asking employees to exercise their options within 90 days of leaving the company, or forgo the equity, is also employers “screwing” employees. Nothing more.

Is not offering doggy day care “screwing” employees as well? Asking for a friend, in California.

“Non-competes and employee option expiration are outrageous! We’d NEVER do that to employees!”

Translation: “We’re hiring! Chef-prepared veganic meals daily. All you can drink Soylent.”

Employers (including current entrepreneurs) have wants and needs. Employees have wants and needs. Startup investors have wants and needs. And many of them conflict. Acknowledging it, instead of finger-pointing and grandstanding, makes debate possible.

Humanize the Issue

I’m very much a fan of humanizing complex business issues; which to me means distilling them down to basic norms and ethics of human interaction. It’s easy to get caught up in cold business calculus when you talk about “employers” and “employees,” instead of reducing the issue down to people simply bargaining with each other.

Say I’ve spent years building up a family restaurant, with all of my special recipes, business contacts, processes, etc., and I invite you to come work with me. I’m going to teach you everything about the business; all of my secrets. But to ensure I can trust that you aren’t just going to take everything I teach you and use it somewhere else, I ask you to agree not to compete with us for a year if you leave.

Am I an asshole? Or am I simply protecting myself somewhat from betrayal? I can think of lots of human scenarios in which this kind of bargain is perfectly acceptable and reasonable. And with my free-market tendencies, I don’t feel comfortable with the government dictating that me and my prospective employee can’t simply agree among ourselves what the right bargain is.

And now we’ll have the necessary rebuttals.

But this isn’t about family restaurants, Jose. This is about Google and Apple trying to keep powerless employees from choosing where they want to work.

Is it really? You think the Pre-Series A entrepreneur with 10 employees isn’t exposed to a key employee walking with everything she’s learned and taking it somewhere else?  There are valid arguments for why non-competes need to be right-sized for the circumstances, and why perhaps very large corporations shouldn’t get the same benefits from them as smaller businesses. And also that lower-level staff should get more freedom than employees closer to core IP/trade secrets. Courts already think about them this way.

And let’s also stop playing the violins for a second. Are today’s tech employees, especially in startup ecosystems, really powerless?

But confidentiality provisions and other IP protections still protect companies, even without non-competes.

Trust me, it is 100x as expensive to prove in court that someone stole your trade secrets than it is to point to a paragraph in an employment agreement and be done with it. Google and Apple have the resources to fully enforce their IP confidentiality. Most small companies / startups do not. Today, total banning of non-competes may help Goliaths more than Davids.

There may even be a feedback loop in which total banning of non-competes increases trade secret poaching by large corps who can throw millions at key employees and pay for armies of lawyers, which over time reduces incentives for entrepreneurship in those industries that require long-term trade secret nurturing to compete with incumbents. I can see evidence of this in certain kinds of hardware startups where talent is subject to poaching by Apple, Google, etc. and for which the lack of non-competes makes it impossible to stop.

But removing non-competes requires employers to hold onto their employees in other ways.

I get it. Government reduces the power of an employer, so the employee now has more leverage. Employee therefore gets better treatment. Wonderful. But the point of this post is that employees aren’t the only people in the business ecosystem that matter, and there are valid arguments on the other side that are worth hearing. Acting as if everything in an economy should be biased toward employees, and against employers, is how you get European-levels of stagnation and unemployment.

Non-Competes are the Norm. 

Outside of California, non-competes are the norm, and they can be valuable among the many other bargaining mechanisms between employers and employees. They can help provide a foundation of trust, which allows employers to invest in their employees for the long-term.

Maybe you’re so gung-ho on the total free flow of talent and “ecosystems” that you absolutely want to forgo non-competes. That’s perfectly fine. Every company is different, and has its own culture. But at least understand why your counterparts at other companies may think differently about the situation, and offer alternatives. That’s how healthy labor markets are built.

The right answer on non-competes probably lies somewhere in the middle of the two polarized sides. On the one hand, it is definitely unfair for a powerful 20,000 employee behemoth to be able to restrict even a secretary from working at a competitor. I think we can all agree on that, and the courts already do. But that doesn’t mean the same rules should be applied to the key employee at a 10-employee startup.

On the other hand, there is a valid argument that the level of hyper competition in Silicon Valley is not something other ecosystems should try to totally replicate. It may lead to talent wars, which waste resources on frivolous perks, and require larger rounds of capital. It may also hurt the ability of companies to invest in their talent for the long-term, because they’re constantly worried about that talent being bought out by a better capitalized competitor.

We should all agree that there are valid points to be made on both sides, and valid disagreement as to what a “healthy” startup ecosystem really looks like. The grandstanding and obfuscation of misaligned incentives is the problem.

Transparency, Risk, and Failure

TL;DR: In the very uncertain, high risk environment of an early-stage startup, the most successful founders are extremely good at practical risk mitigation. One of the most important forms of risk mitigation is to build a culture of transparency and honesty at all levels of the company; meaning people say what they’re thinking/feeling, and do what they say they’re going to do. No politics. No surprises.

Background Reading:

One of the biggest myths, in my experience, about successful entrepreneurs is that they are generally risk-seeking, risk-loving, uber-optimists who fearlessly run right into unknown unknowns, expecting things to turn out for the best. It’s just false. My word for the person I just described is “idiot.”

Yes, they are optimists, but what they’re often optimistic about is their risk mitigation skills. To an outsider, they may look fearless and indifferent toward risk. But in their mind they’re constantly analyzing risks, including seeing risks that others don’t see (the paranoid survive), and actively taking steps to address them.

In the early days of a company, without a doubt one of the largest sources of risk is, to put it simply, people. Co-founders, employees, consultants, commercial partners, investors, advisors, etc. Before your company has become a fully greased and well-running machine with an established brand, market presence, and gravitational pull, it is, in large part, a highly fragile vision of the future; dependent, to the extreme, on a handful of people and their ability to execute toward a common goal. It takes just one “bad” person, or decision, or accident, in that group to bring it all crashing down. 

Each person carries around risks; either risks that originate from them, or risks they know more about than others. Examples:

Co-founders: Are they truly satisfied with their equity stake/position at the company, and committed to the cause? Do they feel like the CEO is the right person for that position, and making the right decisions, with the right input?

Employees: Are they happy with their compensation/position, given the resources and stage of the company, or are they already planning an exit? Do they feel like the company is moving in the right direction? Are there behaviors/activities going on at the company that the C-suite should know about, but maybe aren’t aware of?

Commercial partners: Are their intentions the ones they’ve actually stated at the negotiation table? If circumstances or incentives change, will they try to preserve the relationship or at least reasonably negotiate a fair break, or will they try to maximize one-sided gains?

Investors: Do they truly believe the current executive team can execute effectively at the current stage of the company, and if not, have they communicated their thoughts to the team? If they are planning for changes, are they letting the team know, so the process can be open and balanced?

By working with people with a heavy bias toward transparency and honesty, you maximize your visibility into risks, which maximizes your ability to proactively address them. Risks that take you by surprise are 100x more deadly than those you can see coming. But what does transparency mean, and how do you find it?

Transparency means:

  • Saying what you’re truly thinking, feeling, and planning to do, instead of what may be optimal for you to convey in a short-term self-interested sense;
  • Even if you’re not the best at verbalizing your thoughts/feelings, conveying them in other non-verbal ways – transparent people tend to show more emotion. The perpetually sterile, calculated, always careful not to speak off-script demeanor that all of us encounter in business is the opposite of what you should look for.

It does not mean blurting out your thoughts at random without proper self-awareness or sense of propriety, or conveying more information than specific people really need to know. The “radical transparency” I’ve read about in some circles – for example, the idea that everyone needs to know everyone’s compensation – in my mind is asking for trouble. There is always information that the CEO has that should be heavily filtered before it gets to employee #200, and visa versa. But a thoughtful, respectful, durable culture of transparency ensures that the right information flows to the right people who truly need it and can benefit from it. 

It also does not mean always being the nicest, most agreeable person in the room.  Sycophants and glad handers may keep the peace, but at a cost of smothering you with so much bullshit that you can’t hear the things you really should be hearing. There is an art to conveying uncomfortable information, and people can be trained/coached for it, but it will always still be somewhat uncomfortable.

I’ve been very happily married for almost 10 years (this December!), but I’ll be damned if I ever tell you that hasn’t come with conflict. If anyone ever tells me that they’re in a serious, complex relationship that is completely conflict free, I hear one word in my mind, and one word only: divorce. Small conflicts prevent massive ones. If there is honesty and transparency, there will be some conflict, and it will make you stronger. 

And of course, if you’ve struggled to find, attract, and retain people who are honest and trustworthy, a very good place to analyze the problem is a mirror. Company culture is very much a reflection of the people who started it. Be the person you expect others to be.  And if you want transparency, don’t penalize people when they act accordingly.

At the end of the day, transparency is the foundation of trust in relationships, and the data is universally clear that virtually nothing helps teams, businesses, and broader networks thrive (and minimize serious conflict) better than trust. In the world of startups, there are hundreds of sources of potential failure that you are constantly battling against, and that you can’t do a lot about. Very very few risk mitigation tools are in as much of the founders’ control as the culture they implement in their team from Day 1.

Do the intentional, hard work up-front to recruit/engage people who say what they’re thinking, and do what they say they’re going to do, and you’ll maximize your chances of survival. You’ll also keep your legal fees way lower in the process.

The problem with chasing whales.

TL;DR: Always trying to work with “the best” people in any category – investors, advisors, accelerators, service providers – can result in your company getting far less attention and value than if you’d worked with people and firms who were more “right sized.”

Background reading:

Founders instinctively think that pursuing the “best” people in any category is always what’s best for their Company. Need VC? Try to get Sequoia or A16Z. Need an advisor? Who advised the founders of Uber and Facebook? Need an accounting or law firm? Who do the top tech companies use?

The problem with this approach is that it confuses “product” value delivery – where what you get is mass produced and therefore uniform – with “service” value delivery – which is heavily influenced by the individual attention you are given by specific people of varying quality within an organization.

If you buy the “best” car, it doesn’t matter whether you’re a billionaire or just comfortable, you paid for it, and you get effectively the same thing. Buying the “best” product gets you the best value.

Don’t chase whales if you’re not a whale.

However, if you hire the “best” accounting firm, that firm will have an “A” team, a “B” team, and possibly even a “C” team within it. That is a fact. Every large service-oriented organization has an understanding of who their best clients are, and allocates their best people and time to those clients, with the “lesser” clients often getting terrible service. To get the “best” service from one of the best service organizations, you need them to view you as one of their best clients; otherwise you’re going to get scraps.

To get real value from a “whale,” you need to be a whale yourself. Chase whales (the absolute best people in their category) without having the necessary weight to get their full attention, and they’ll just drown you. In many areas of business, getting the full attention and motivation of someone who is great, but not olympic medal level, can be far better for your company than trying to chase those who may take your money or your time, but will always treat you as second-class, or a number. I call this hiring “right sized” people. 

Firms matter, but specific people matter more.

I use this reasoning a lot in helping founders work through what VC funds they are talking to. The brand of the firm matters, but you want to know exactly what partners you are going to work with, and you want to talk to companies they specifically have worked on, to understand how much bandwidth you’re going to get. There is a wide range of quality levels between partners of VC firms, and going with someone local who will view you as their A-company and give you the time you need can be much more important than being second or third fiddle at a national marquee firm.

We also use this reasoning in explaining to clients how we see ourselves in the legal services market. We do not work for Uber or Facebook, and we are not even trying to work with the future Ubers or Facebooks, or other IPO-seeking companies of the world. The very high-growth, raise very large rounds in pursuit of an eventual billion-dollar exit via acquisition or IPO approach is suited for certain kinds of law firms and practices designed for those kinds of companies. Most of those firms are in Silicon Valley, because most of those companies are in Silicon Valley.

There was a time when every tech ecosystem looked to Silicon Valley for guidance, and did everything it could to get its attention. Now a lot of people outside of the largest tech ecosystems have come to realize that, in fact, Silicon Valley isn’t really that interested in them; and thats ok. Those SV funds, firms, and people are whales looking for other whales. That is totally fine – the world needs whales, but the rest of the world needs help too.

If you are a unicorn, or legitimately are viewed as on the track to be a unicorn, then working with VCs, advisors, law firms, and other service providers that cater to unicorns will get you great service by ensuring you are working with the top quality individual people within them.

Hire within your class.

However, a recurring trend we’ve seen in many areas, including legal, is companies initially hiring one of the national marquee firms because they wanted the “best,” only to realize that not only were they working with that firm’s B-player or C-player, but even getting responses to e-mails from a specific person was a matter of days and even weeks. By “right sizing” their service providers, they fixed the problem.

In short: be honest with yourself about what you’re building, and then be honest about whom you should build it with. If a $100MM or $200MM, or whatever non-unicorn number, exit would be a true win for you, that is nothing to apologize for. The world needs those kinds of companies; lots of them. But to avoid a nightmare, align yourself with people truly “right sized” for a company on that kind of track.

When hiring any firm in any service industry, ask who exactly your main contact will be, and talk to the clients/portfolio companies of that specific person. Does their client base look a lot like the company you’re building? How responsive are they to you in your initial communications? That can tell you a lot about what level of bandwidth/priority you’re going to get from them.

For the kinds of strategic relationships that really matter, where the quality of advice depends on specific people and the attention they’ll give you, focus on “right sized” people; not just engaging the “best” firms. Don’t get pulled under water by chasing a whale that isn’t really that interested in you.