Related reading: Non-Competes

Only a handful of states have full bans on non-competes, with California being the most prominent. While certain commentators with very specific motives (more on that below) want the market to believe that the total elimination of non-competes is essential for a thriving startup ecosystem, that is simply not the case. The vast majority of startups outside of California leverage non-competes in their employee documents, and for good reason.

When an employer and a key employee sign a contract with a non-compete, the “deal” is simple: I (as an employer) am going to invest in you (the employee), and that investment will take a long time to recoup returns. I need some reassurance that you are not going to take that investment, as well as all the specialized knowledge I hand you (particularly in the early days), and then jump ship to a competitor the moment they offer you a better compensation package. The economic logic is not that different from the logic for patents on strategic IP. Non-competes can provide a foundation of trust that allows employers to invest in their employees for the long-term.

You can see how important this arrangement can be to startups, because at their early-stages they are very vulnerable to having large companies or highly funded competitors hiring away their strategic talent. The total elimination of contractual non-competes can generate extremely expensive talent wars between startups and large companies. Talent wars make startups more dependent on venture capitalists for their success, and that is why VCs are often the most vocal proponents of non-compete bans.

Of course, non-competes are being abused. That is undoubtedly true. There are very strong arguments that very large companies should be limited in their ability to use them; and also that non-key employees, like low-level staff, should not be subject to them. But there are equally strong arguments that allowing early-stage companies to negotiate non-competes with their most important talent can strengthen entrepreneurship and startup creation.

In Massachusetts’s case, this debate resulted in a compromise. Rather than banning non-competes completely, various extra requirements were put in place that will have the effect of startups limiting them mostly to key strategic hires/executives, which to many people makes total sense. While you will need to work with counsel knowledgeable of the specific context in which your company is hiring, an extremely high-level summary of the changes is:

  • Non-competes of greater than 1-year are presumed to be unreasonable.
  • The non-compete must include a “garden leave” clause requiring extra payment to the employee during the non-compete enforcement period, or (and this is important) “mutually agreed” additional consideration.
  • The non-compete is not enforceable if the employee is terminated without cause (but is enforceable if they leave voluntarily).

The garden leave or mutually agreed additional consideration requirement is going to be key for Boston startups to follow. No one is fully sure what sufficient additional consideration will be, but the full consensus is that it must be meaningful; like a signing bonus, or an equity grant.

The key takeaway here is that non-competes are not banned entirely in Massachusetts. The legislature heard the arguments on both sides, and made a reasonable compromise. The result of that compromise will be that Boston startups will start limiting their non-competes to their most key employees for whom the threat of departure to a competitor is a material strategic threat; which is the main point of non-competes to begin with.