Wednesday, June 10, 2009

Gov. Patrick on Non-Compete Agreements in Massachusetts


I had the chance to chat with Governor Deval Patrick for a few minutes today at Microsoft's NERD Center, toward the end of the Innovate MassTech meeting (aka the IT Collaborative Study Group Meeting.) So I asked him about non-competes.

Paul Sagan, the CEO of Akamai, had just said on stage that he is in favor of keeping non-compete agreements legal and enforceable in Massachusetts, and that he'd seen no data that says that non-competes have any effect on making us less competitive. (The best data I've seen comes from this excellent paper written by three folks at Harvard Business School.) Another CEO told me he liked the fact that employees were more loyal (or less mobile) than in California, so you didn't have to worry about constant turnover here.

Yet at the event, I also spoke with a number of people who'd either been prevented from hiring someone they wanted to hire because of Massachusetts' stance on non-competes, or who knew first-hand of someone who'd been prevented from moving from one company to another.

I asked Gov. Patrick whether the non-compete issue had shown up on his radar screen, and he said it had -- he'd heard about it here in Massachusetts and on a recent trip to California. "I don't have a stake in the status quo," he said. He'd heard arguments from individuals who have been prevented from taking jobs because of non-competes, and also from executives who feel that keeping employees from jumping to other firms in their industry helps them stay competitive. "There's not a consensus view" of whether they're a positive or negative thing in Massachusetts, he said. I suggested that larger companies would love for non-competes continue to continue to be enforceable, while many small start-ups would like to get rid of them -- and that the bigger companies have more political throw weight. The governor didn't agree that things break down so neatly between big and small.

He seemed like he's still in listening mode, willing to be persuaded: "If there's consensus in the industry [as to whether they're a good or bad thing], I'm happy to support that."

And then he went off to be pounced upon by the rest of the media mob... (see pic above)

Labels: , , , , , , , ,

Thursday, June 19, 2008

What Happened at Today's Panel Discussion About Non-Compete Agreements

Probably the most interesting aspect of this afternoon’s discussion of the impact that non-compete agreements have in Massachusetts, held at Harvard Law School, was the absence of any company willing to publicly defend the practice of having employees sign non-competes.

The organizers had lined up Melanie Haratunian, an Akamai executive, to represent that point of view, but she backed out earlier this week. The reason? Akamai is apparently in the midst of enforcing a non-compete agreement against a former employee, and was concerned that that employee’s counsel might be in the audience today. That, at least, was the story I was told beforehand by several of the event’s organizers; perhaps one of you can fill in the details.

Moderator John Palfrey simply said, in opening the discussion, that Akamai “had to pull out of this event due to some pending litigation related to this topic.” (When I called Akamai spokesman Jeff Young for confirmation, he said he was not aware of any such litigation.)

I wonder why, if the stalwarts of the Massachusetts innovation economy believe so strongly that non-compete agreements are essential to retaining their best people, that no one would come forward to defend that position? EMC? Nuance? Genzyme? Boston Scientific? Anyone? Anyone?

Update: Here's some video I shot:



Some notes from the discussion…

Harvard prof. Lee Fleming said that people and ideas move from states that enforce non-competes to states that don’t (think California.) His research has found that non-competes squelch employee mobility by about 20 percent, and 30 percent for experts in a given field. Fleming asked whether non-competes might stifle the reallocation of the best people to the best business opportunities.

Paul Maeder of Highland Capital Partners said that non-competes are like diabetes -– a silent killer. Before a company can get off the ground, a prospective founder thinks twice about risking a lawsuit.

One problem with the way non-compete agreements are written, said Bijan Sabet of Spark Capital, is that they often prohibit people from working in “an area deemed to be competitive,” which can be vague.

Maeder said he is seeing a lot of California start-ups crop up that aim to challenge Akamai’s business of Internet content delivery. He said that one of them “will likely become the market share leader,” and asked whether we want that successor company to be in California, or here

Rich Miner, an exec at the Cambridge office of Google, says that the company doesn’t require people to sign non-competes. At a previous company, Wildfire Communications, Miner recalled trying to hire an engineer from Comverse. Comverse decided to chase the employee and enforce the non-compete, and so Wildfire had to pay him for six or eight months before he could actually begin working.

Maeder observed that Washington State, where non-competes are enforceable, has produced two great tech companies: Amazon.com and Microsoft. But he noted that there had been no great operating system spin-offs from Microsoft, or online bookstore spin-offs from Amazon.

Maeder also compared non-competes to indentured servitude, and said they foster “sleepiness” here in Massachusetts. He advised employees to ask about them at the beginning of the interview process, not on the first day of work -- when it's too late to negotiate anything different (like six months instead of a year).

Maeder says that he discourages his portfolio companies from requiring employees to sign non-competes, but he said that isn’t yet a firm-wide policy at Highland. (It is, apparently, at Spark Capital.)

Maeder suggested that there are three ways to change the rules surrounding non-competes in Massachusetts:

1. Legislative fiat (“I don’t think it’s going to happen,” he said, having visited Beacon Hill recently. Miner agreed, saying that change needs to be “a grassroots effort.” He did say, though, that he mentioned the issue to Governor Deval Patrick when Patrick visited Google’s office recently.)

2. Educating employees about their impact

3. Get venture capitalists and executives who serve on boards to speak out about the issue with the companies they work with.

During the Q&A period, Steven Chow, an attorney at Burns & Levinson, recalled that he used to sue EMC on behalf of Digital Equipment over employees who were violating non-compete agreements by going to work at EMC. (Didn’t that do a good job of preserving DEC’s dominance?) He said that non-competes help “keep the cost of engineers down,” since employers don’t have to compete as aggressively on salaries.

'Twas a good discussion, but it would’ve been about 10,000 percent more interesting had someone been on the panel to defend non-competes as a tool for talent retention, or make a case that getting rid of them wouldn’t necessarily make Massachusetts more competitive.

Next time?

Labels: , , , , , , , , ,

Monday, May 19, 2008

June 19th: Discussion About Non-Competes at Harvard Law

Bijan Sabet at Spark Capital has been trying for a while to assemble an open discussion about the impact of non-compete agreements on the economy here in Massachusetts... and it looks like it has finally come together for June 19th, at Harvard Law School. An RSVP is required.

Here's the description:

    The use of employee non-compete agreements by Massachusetts companies is routine, with employers mandating that employees steer clear of any business of a competitive nature once they leave their present jobs, typically for a year or more. Many believe these agreements are critical to guarding a company’s hard-earned intellectual property — protecting legitimate business interests, and thus our region’s economy. Others, however, believe that non-competes are nothing more than handcuffs that prevent talented entrepreneurs from bringing new innovations to market and, in some cases, even driving entrepreneurs to leave the region to pursue their innovations elsewhere. In this session, we’ll bring together some of the area’s best known venture capitalists, entrepreneurs and executives to explore the issue of non-competes and weigh the pros and cons of their use here in the Commonwealth. Are non-competes protecting innovation and economic growth in Massachusetts? Or stifling it?

    Panelists will include:

    - Jeremy Allaire, founder & CEO, Brightcove
    - Melanie Haratunian, general counsel, Akamai
    - Paul Maeder, general partner, Highland Capital Partners
    - Lee Fleming, associate professor of business administration, Harvard University
    - Bijan Sabet, general partner, Spark Capital
    - Moderator: John Palfrey, Clinical Professor of Law and Executive Director of the Berkman Center for Internet & Society, Harvard Law School

Akamai CEO Paul Sagan was definitively for non-competes when I asked him about the issue last fall... not sure where Jeremy Allaire stands... but having someone from EMC, the most active enforcer of non-competes in our state, would be good. Perhaps they'll at least attend, and contribute from the audience...

Labels: , , , , , ,

Monday, December 31, 2007

Sunday's Globe column: How non-competes make states less competitive

Yesterday's Globe column attempts to explain how non-competes can make states less competitive by limiting the cross-pollinating effects of people moving from one company to another, or forming new start-ups.

Here's some video of HBS researcher Matt Marx explaining how non-competes work -- and how they worked on him (Matt began his career as a speech recognition engineer in Boston, before moving out to Silicon Valley and then back):



Bijan Sabet, the VC at Spark Capital who has been leading the charge to change the law (or at least the culture) surrounding non-competes in Massachusetts, takes me to task for not talking to big company execs about how much they love non-competes. My colleague Carolyn Johnson already did that quite ably in this piece.

Very simply, big companies like to use non-competes as flypaper, so they don't have to worry about their best employees zipping away when a better opportunity presents itself. (At Future Forward back in November, Art Coviello of RSA/EMC and Paul Sagan of Akamai said as much... Sagan even suggested that a good solution to the problem would be to have California *start* enforcing non-competes.)

Two interesting data points about local companies...

- EMC Corp. had 8900 employees in Massachusetts, and 4900 in California (these numbers include VMware) at the end of Q3 2007. The California numbers were growing *much* faster -- California had added 1400 people since Q3 2006, and Massachusetts only 270.

- Biogen Idec has 1750 employees in Cambridge, Massachusetts, and 400 in San Diego, California.

Why (let me ask rhetorically) do these companies even bother having operations in California if it is so hard to retain top talent without non-compete agreements?

Labels: , , , , , , , , , ,

Tuesday, December 18, 2007

Looking at Akamai's Competition

Talking to a well-known VC yesterday, the subject of Akamai came up... I suggested that they may be one of our region's new pillar companies; he argued that Akamai is facing scads of competition, and hasn't been as quick to develop new services, or buy rivals, as it should be. His view was that Akamai's moment in the sun may be a fleeting one.

My Globe colleague Hiawatha Bray has already been thinking about this topic; a story of his that ran yesterday was headlined, 'Akamai's Competition Grows in the Data Delivery Business.' It's worth a read. Here's an excerpt:

    ...the market has had a jaundiced view of Akamai for much of the year. Akamai's shares traded above $59 in February, but have slumped to around $35. Investors haven't taken much comfort in the company's solid financial performance.

    ..."Everybody's been piling into this space," said Melanie Posey, an industry analyst at IDC Corp. in New York. "A lot of the new companies, and also some of the network providers, are stepping up their efforts."

    Last December, Level 3 Communications Inc., a major Internet service provider, made its move into the space by purchasing the content delivery business of Savvis Inc. Limelight Networks Inc., a major Akamai rival with about 10 percent of the market, went public in June, and in August disclosed a major deal to deliver Internet music, video software, and games for Microsoft Corp.

    There are plenty of other smaller competitors, including Mirror Image Internet Inc. of Tewksbury, a privately held firm that entered the content delivery service in 1997, at about the same time as Akamai. Mirror Image handles streaming video for The New York Times Co., the Home Shopping Network, and a variety of local television stations in the United States.

Labels: , , , ,

Monday, December 3, 2007

Let's Get Rid of Non-Compete Agreements

Venture capitalist Bijan Sabet has launched a discussion about getting rid of non-compete agreements in Massachusetts -- and I'm glad. In fact, Sabet's firm, Spark Capital, has decided to stop requiring that its portfolio companies ask employees to sign non-compete agreements.

A lot of people say that non-competes aren't a big deal. If you are one of those people, why not read this piece: 'SANgate CEO ruled out of job by EMC non-compete lawsuit.' Non-competes are not enforceable in California, Connecticut, and many other states ... but they most definitely are in Massachusetts.

Other people say that it is impossible to measure what the impact of enforceable non-competes is. And that's sort of true: it's hard to tell how many Raytheon, Analog Devices, EMC, or Biogen employees today have great ideas for start-ups ... or would be more productive working for a start-up ... but they can't do it because they worry about being tangled up in litigation.

But there has been some great data collection recently, by a Harvard Business School PhD candidate named Matt Marx. Marx and two colleagues looked at what happened after legislators in Michigan accidentally made non-competes enforceable in 1985. Inventors were suddenly 34 to 51 percent less likely to move from one company to another. And the "star" inventors were the least likely of all to move. (Marx also provides a history of the non-compete, which traces back to 1414.)

You can read an excellent Q&A with Marx here. The full research paper is here (in PDF form). Here's a cool data point: Marx himself was an engineer/executive at a Massachusetts speech-recognition company, Applied Language Technologies. While Marx wouldn't have been able to jump to another Massachusetts speech recognition company because of our state's enforceable non-compete agreements, he was able to go work at a Silicon Valley speech rec company, because non-competes aren't enforceable there. He says:

    At first I thought I wouldn't be able to take the job [in Silicon Valley] given the noncompete agreement I had signed in Boston, but I was nonetheless able to make the move because the California courts generally refuse to enforce such agreements. Ironically, when I returned to Boston a few years later for business school, the founder of the first company [Applied Language] invited me to do some consulting on the side while a student, but I wasn't able to because the Massachusetts courts would enforce the noncompete that the California company made me sign.


But if we want to change the non-compete environment in Massachusetts, we need more than just start-ups and VCs to agree that non-competes are a hindrance. We need the state legislature to change the law. That will require that big companies join in the crusade -- and in recent conversations I had with the CEO of Akamai and the president of RSA Security (now part of EMC), it struck me that they are very unlikely to want to get rid of non-competes.

Labels: , , , , , , ,

Friday, November 9, 2007

Future Forward 07: Some rough notes

I have to confess that I did not take copious notes during Future Forward yesterday, a conference I help organize, but I did shoot some video, which I'll post here soon. (Update: video is below.)

But there were some great questions raised, some really insightful comments, and lots of interchange between the speakers and the tightly-packed audience.

The big question in the opening panel, which featured CIOs and CEOs, was whether it makes sense to be the "first one in the pool" when it comes to deploying new technology, or to be a fast follower. Bill Wray from Citizens Bank said his budget doesn't allow him to experiment in too many places, so he tries the latter strategy. George Orlov from Forrester Research said he's creating a sort of sandbox, so that his employees (technology analysts) can play with new technologies they are writing about. Ken Chaisson from Legal Seafoods talked about how some of the company's servers gravitate to new technologies, and that others follow when they see that the first group of servers is turning tables faster and earning more tips.

CEOs Paul Sagan (Akamai) and Art Coviello (former CEO of RSA Security, now a division president within EMC) were up next. Sagan talked about Akamai's near-death experience after the dot-com bubble burst, which required letting go hundreds of employees and getting out of high-priced leases. He also talked about how the company had to focus - quickly - on what he called "permanent economy" customers. I asked whether the start-ups in the room represented the "transient economy." "Too soon to tell," Sagan quipped.

The question of whether the enforcement of non-compete agreements hampers entrepreneurship in Massachusetts came up. Sagan said cheekily that we should lobby California to institute non-competes, rather than eradicating them here. Attorney Gabor Garai from Foley and Lardner, in the audience, seemed to think that they're a real problem. When Art Coviello got on stage, the first thing I asked him was his position. EMC/RSA, of course, likes to hold on to its best employees, and Coviello said non-competes help them do that.

Next, Dan Primack ran a very high-energy panel about VCs, IPOs, and M&A. He started by exploring corporate venture investing ... and particularly the fickle nature of it. Corporations open and close venture groups as the economy changes, and one of the VCs on the panel, Maria Cirino, said that in her previous life as an entrepreneur, one corporate venture arm replaced the person who sat on Maria's board three times in four years. The panel also touched on the problem of big funds (Battery was named) trying to do everything from early-stage deals to buy-outs. There was quite a lot of skepticism about that, but no one from Battery or General Catalyst was present to defend the big boys.

Giles McNamee brought up a very salient piece of data - only one or two percent of companies ever make it to an IPO, so it's quite natural that entrepreneurs consider and explore the M&A route.

After a nice long lunch, we came back to hear from the delightful and insightful artist John Maeda, who works at the Media Lab. I've long been a fan of John's work, but this was the first chance I'd had to see him speak. (TED has a video of a shorter talk he gave about his book 'The Laws of Simplicity,' but yesterday John got a full hour.)

Next, George Colony and Fidelity exec Charlie Brenner sparred on stage about the future of IT. Colony is trying to change the term to BT (business technology), since he says IT people should no longer be talking about information-related metrics (how many records are in a database, or how many queries they handle every day), but rather business metrics, like how much they've increased the average order size on the Web site.

Colony blasted the news media, mentioning the NY Times in particular, for "pumping up Google like they pumped up Amazon in 1997." The degree of hype, he said, is "very irresponsible." Colony was very skeptical that Google can revolutionize the cell phone business, since its new Android strategy will require carriers to work against their natural interests.

The last session, as tradition dictates, is a murderer's row of entrepreneurs, showing new products they're working on. Mark Thirman of AirPrint Networks had a pretty nifty demo, of a small printer that can spool out lottery tickets, movie tickets, or little maps; it communicates via Bluetooth with your cell phone. And Mike Phillips showed off Vlingo's speech recognition technology, which speeds up data entry on cell phones.

One VC in the audience made a telling comment. He asked a question of Vertica CEO Ralph Breslauer, dismissing the rest of the panel as "not real companies" (I'm paraphrasing). Everyone else was a consumer-oriented play, and some have slightly hazy business models. Are Boston area VCs just a wee bit prejudiced toward heavy-duty enterprise tech? Hmmm....

One thing we've started doing is allowing the audience to "invest" play money into the start-up company that they like the best.... as a joke, we put General Georges Doriot on the face of the bills (Doriot was the founder of the first venture capital firm, ARD, and a prof at Harvard Business School.) During the cocktail hour, one of the FF attendees, Tom Hagan, told me that he'd actually been in a pitch meeting with Doriot, early in his entrepreneurial career. Pretty cool ending to the day...

Labels: , , , , , , , , , , ,

Tuesday, September 25, 2007

MIT's Business Plan Competition: From $10K to $300K?

MIT's annual Entrepreneurship Competition started in 1990, with $10,000 of prize money... so for a long while, it was known as the $10K competition. In 1996, the purse grew to $50,000, and then to $100,000 last year.

The competition has a pretty good track record for spawning companies. While some never make it past the embryonic stage, Akamai Technologies was a finalist in 1998. Direct Hit won the competition in 1998, and then was acquired two years later for half a billion dollars. In 1995, Harmonix (makers of the hit videogame "Guitar Hero," now owned by MTV Networks) was a finalist.

This week, I've bumped into a few Sloan students who've suggested to me that the prize money is heading north again this year...to as much as $300,000. One judge I spoke to said he has been hearing rumblings, too.

Bill Aulet, one of the Sloan school lecturers involved in supporting the competition, said yesterday he wasn't ready to confirm any numbers, and several other people connected to the competition didn't return my calls. Given that the most recent change to the competition was adding a new $50,000 "Development" category, which focuses on businesses that can improve low-income communities or developing countries, I'd expect the additional prize money to focus on a new category -- like energy or the environment.

Increasing the prize money three-fold wouldn't be about convincing more students to enter the competition -- just about anyone with an entrepreneurial inkling at MIT knows about it already, and has plenty of motivation to get involved. I think the increase would have three benefits:

    1. Marketing: Ensure that the competition remains prominent on the national scene...attracts more media attention...makes more prospective B-school students aware of Sloan...and brings in more venture capitalists to look at the finalists and winning companies as prospective investments.

    2. Pocket change: Give the winning companies a bit more prize money to use in their start-up stage, assuming they don't find funding quickly from VCs.

    3. Spark more entries in a particular sector, like cleantech.

With $250,000 or $300,000 in prizes, it seems like the MIT competition would be the country's biggest.... the state of New Hampshire ran a competition with $250,000 in cash prizes from 2003 to 2005, but they haven't repeated it since. Across the pond, the London Business School has a $500K competition, focused on homeland security.

Labels: , , , , , ,