San Francisco Silicon Valley's tech boom and hiring frenzy of engineers and developers have helped rents soar.
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By Joe FitzGerald
June 23, 2015

One key driver in the astonishing success of Silicon Valley over the last 50 years has been the free flow of talent. It’s not just a cliché: The Valley rewards risk-takers. Skilled engineers and managers migrate to companies big and small – or start new ones – in search of new challenges, leaving behind stagnant companies and ideas. It’s pure capitalism – applied to human capital. And the history of the technology industry suggests the model works magic.

Nonetheless, some tech companies attempt to impede the natural flow of talent by tying the hand of employees with non-compete agreements. In a few states – including California – non-competes are effectively unenforceable. But many states still allow non-competes – and the companies that require them of valued talent fiercely defend using them.

It’s not hard to see why some companies like them. The whole point of these agreements is to discourage employees from seeking greener pastures. Employee turnover, especially in talent-scarce areas like sales, marketing and engineering, is a major risk for every tech business. If you can reduce turnover, you can spend less time searching for new talent. And, if you know that the employees you have can’t leave to go to a competitive job, you don’t have to pay them as much to keep them or incent them to stay with perks

If only life were that simple.

In truth, there is no free lunch. (Not even in Silicon Valley, where everyone seems to serve free lunch.) Tempting though they may be, non-competes are bad for everyone they touch, employees and employers alike.

Indeed, there is considerable evidence that in a world in which the workforce is increasingly mobile, tech talent on balance is fleeing states that enforce non-compete agreements. A 2011 study found that inventors are leaving pro non-compete states (like Massachusetts) in favor of states that don’t have them (like California). In fact, the researchers found out that those people with the most patents – the most inventive employees – show an above average tendency to move to states that won’t enforce non-competes.

It only makes sense – the most talented people have the most to lose by staying in a non-compete friendly state. By design, non-compete agreements limit job opportunities of highly skilled workers. With the reduced choices that come with non-competes, The Atlantic noted recently, employees have less incentive to develop new skills and knowledge. The Atlantic pointed to a study by UCLA researcher Mark Garmaise, which found that managers operating under non-compete agreements earn less than those in states which don’t enforce non-competes. In essence, the finding shows that non-competes achieve their goal: they reduce labor costs.

That said, it is worth noting that venture investors – who have every reason to tie up their talent for as long as possible – are no fans of non-competes. The New England Venture Capital Association, for instance, has been advocating that Massachusetts should drop support of non-compete agreements. Why? Well, perhaps they see the fruits of the non-compete right there in New England. The Route 128 corridor outside Boston was once a hotbed of technology innovation that rivaled Silicon Valley – but innovation in the region has faded considerably. You see, California not only has better weather – there’s a better innovation climate for the upwardly mobile entrepreneur free of non-compete agreements.

While non-compete agreements might help employers hold on to their staff, they may discourage ambitious job candidates from joining in the first place. Given the option of joining a company hell-bent on making it difficult to leave, or one that celebrates entrepreneurship and ambition, which would you choose?

The bottom line is that non-compete agreements are bad for business. They are anti-competitive and anti-capitalist. While they reduce labor costs, they also provide disincentives to employees to expand their skills. They reduce productivity, create labor market inefficiencies, depress wages and discourage innovation.

Technology businesses have been built by brazen pioneers – by brilliant people willing to take big risks in return for big payoffs. Bill Gates, Larry Page and Sergey Brin and Elon Musk and Mark Zuckerberg. Giving employees freedom to develop their careers via periodic job-hopping helps them learn, stay connected, network and get better at their work. Non-competes do exactly the opposite. And even if you could get them enforced, is there any sense in developing a reputation as a company that sues its own former employees? That seems to send the wrong message to the very talent you want to recruit.

Sure, there are times when it makes sense for employers to take measures to protect proprietary information. But there are other solutions to that issue that do not flat out stop talented employees from offering their services in the marketplace. Enough already: it’s time to acknowledge that non-competes are a bad idea – and stamp them out.

Joe FitzGerald is vice president and general counsel at Pure Storage based in in Mountain View, California.

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