Large companies play a key role in the entrepreneurial ecosystem, creating a pool of skilled employees who periodically leave to embark upon new ventures. Corporate noncompete agreements interfere with this organic spillover effect.
Ostensibly used -- usually by larger companies -- to protect trade secrets, noncompetes may help explain why, for example, Silicon Valley has historically outpaced Boston's tech hub in economic growth and technology entrepreneurship. In California, where courts have consistently refused to enforce the contracts, the high-tech work force is highly mobile, with knowledge constantly flowing into new companies. In Massachusetts, where noncompetes are enforced, workers have tended to stay in a few large firms for a long time. "Not only do noncompetes make it harder to found a company, but they make it harder to grow a new one, because you can't attract talent in the same way," says Matt Marx, an entrepreneur and assistant professor at MIT's Sloan School of Management who has spent years studying the impact of such agreements on innovation and business creation.
Marx, along with Lee Fleming of Harvard Business School, recently completed a study on how noncompetes affected employment in the speech-recognition-software industry. He found that where the agreements are enforced, one-quarter of people who changed jobs wound up making a career detour -- finding their next positions outside the industry in which they had expertise. Marx also argues that noncompetes are not essential to encouraging R&D investment. In fact, the highest rates of R&D investment are in states that don't enforce them. "Look at Silicon Valley," he says. "Clearly, enforcement of noncompetes is not a prerequisite to support innovation. It's really a question of existing companies versus new companies."
Bottom Line Midcareer executives are a rich source of entrepreneurial talent. Don't trap them with noncompete agreements.