Let's not confuse non-compete agreements with trade secret agreements
As many folks know, I am strongly against employee non-compete agreements. Unfortunately, such agreements are the status quo in the State of MA and are widely used & enforced. I believe they stifle innovation and are simply unfair (for more info check out the Open Competition blog).
People that are in favor of maintaining employee non-competes often intentionally or sincerely confuse non-compete agreements with other agreements such as non-solicitation agreements (NSA) or non disclosure agreements (NDA).
To be clear: employee non-compete agreements are very different than NSAs or NDAs.
I believe in NSAs and NDAs. I believe those agreements are important and they serve to protect the vital interest of the company and their intellectual property. Companies own those things but they certainly don’t own their employees.
At this time there is a lawsuit between Zynga and Playdom related to these issues. The allegation states that former Zynga employees stole documents and solicited Zynga employees amongst other things. (note: I am not a shareholder of either company and I don’t have any insider knowledge).
Essentially Zynga believes those employees broke their NSA and NDAs. Plus, theft of documents is simply property theft which is also addressed by law. It’s illegal.
If those complaints are accurate then Zynga has every right to protect their interests here. And I would do that as well
But let’s not confuse non-competes with other agreements. They are different story.
- Revised Noncompete Legislation Doesn’t Go Far Enough (xconomy.com)
Planning a Great Business
A big chunk of a VC’s day is spent evaluating new businesses for the first time. These interactions take a variety of formats. Sometimes, it’s an executive summary or powerpoint presentation that has been passed over by a trusted source. Other times, it’s a formal, 60-minute presentation. Often, it’s just a casual cup of coffee that may turn into an impromptu (or not so impromptu) demo.
The bottom line though, is that the format through which the business is communicated is not nearly as important as the depth and clarity of thought that goes into building the business. It’s not about writing the perfect business plan, it’s about planning a business well. Business plans are helpful guides, but ultimately, they are just a tool to show that you have identified an attractive opportunity and that your company has a good chance to be a winner. In planning a business (and communicating that plan to an investor) I would think about it as answering a very simple series of questions:
- What is the problem I am trying to solve?
- Is this an attractive market opportunity?
- Why is my solution so great?
- Do I have the best team around the table to win?
- What are my competitors doing and how can I beat them?
- What is the right business model?
- How much money do I need to raise and what milestones will be achieved?
A few more points on each question below:
What is the problem I am trying to solve?
- Simple is better: Often, an overly complex problem is a signal that the problem may not be that meaningful. This doesn’t mean however that the problem is obvious. There are many non-obvious problems that may exist in very complicated industries. But all meaningful problems can be boiled down to something quite simple.
- Contextualize the pain: Even if the problem is simple, your audience may not be able to identify with it because they are either the wrong target market or are just unfamiliar with the industry. Try to contextualize the problem with data, stories, or realistic examples so that it’s clear that the problem is a meaningful one.
- Painkillers better than vitamins: Everyone likes vitamins, but they aren’t a necessity. Painkillers are a different story – when you need it, you really need it. Ask yourself which of these you are. If your solution is a vitamin, it could be discarded when times are tough or when something new comes along.
Is this an attractive market opportunity?
- Big Markets: Obviously, it’s nice to go after a market where there are a lot of dollars flowing through. Also, it’s great to have the wind at your back as well, to show that there is a lot of underlying growth in the market. But while it’s important to show that a market is big and growing – it’s more important to think about whether you are going after an attractive market.
- Attractive Markets: Some big markets are not necessarily attractive markets. Some markets don’t lend themselves well to small startups. There are many reasons for this – it may be an industry where economies of scale are so important that smaller companies can’t compete cost effectively. Or there may be major players in the supply chain that extract all the value. On the flip side, some markets have great characteristics to show that they are ripe for disruption. New technologies may have emerged to change the cost of doing business or present an opportunity to shrink a market (ie: Craigslist and Classifieds). Slow moving incumbents may have failed to innovate or missed out on a particular customer segment. Make the case for why your market is particularly attractive for the company you are starting.
Why is my solution so great?
- Special Sauce or Unfair Advantage: It’s important for entrepreneurs to be realistic and know that there are usually many smart people going after meaningful problems in attractive markets. The question is – why is your product unique and why will you win? Also, over time, margins tend to compress in businesses that don’t have some sort to special sauce of unfair advantage. This can take the form of proprietary IP, proprietary relationships with key customers or suppliers, or network effects if/when the business scales.
- Show and Tell: Ultimately, it’s hard to prove that a product is great without some sort of small scale test or demo. This is especially true in web based software businesses where the cost of getting a product up and running is very modest. Programs like TechStars and Y Combinator have shown just how much progress can be made with very limited investment, so the closer you can get to actually demonstrating the product the better.
Do I have the best team around the table to win?
- Right people at the right stage: It goes without saying that attracting the best talent is vital for a startup. But the team also has to be appropriate with the stage of the company and the tasks at hand. An early stage technology company does not usually need a lot of overhead, so it’s a troubling thing to see a COO, SVP Strategy, SVP Marketing, etc for a company that is still deep in the product development stage. These folks may be excellent, but they aren’t appropriate for what the company needs to accomplish in the first 1-2 years. Also, it’s important to be mindful that the capabilities of an executive differs depending on the types of roles they’ve had. A great marketing executive at a large consumer company may be at a loss when marketing for an early stage company because they are used to dealing with large budgets, multiple agency relationships, and a big staff.
- Pied Pipers: There is something intangible about a founder that can attract great people around his/her company. In addition to evaluating how well suited a team is for their job, a VC is also evaluating how good the entrepreneur is at selling the vision and potential of the company and getting the best people around the table to make it come true. Even if these people aren’t employees of the company, great founders can establish a level of unfair advantage buy recruiting a great advisory board, mentors, or angel investors that will help them win.
What are my competitors doing and how can I beat them?
- Every company has competitors: Very often, we speak with entrepreneurs who will claim that they do not have any competitors. This is false. There are always competitors, and even if they are bad, the entrepreneur needs to be maniacally focused on beating them, and everyone else. One helpful way to think about competition is to think less about product similarities and more about the jobs that customers need to get done. For example, in the early days, Facebook was not an obvious competitor to Google. Their products are pretty different. However, for the job of improving ad targeting, Facebook’s user profile and network data is a meaningful alternative to Google’s approach of analyzing page content and search data.
What is the right business model?
- Find a model that fits: This is not always very obvious. It’s important for an entrepreneur to really understand the levers of their business, because they ultimately have major implications for the product, team, and strategy. You need to be more specific than just saying that your company will “monetize through subscriptions”. What will the pricing be? What will your cost of acquisition be? How will you manage your churn? What will be the lifetime value of the customer? These are all critical questions.
- What do you need to believe?: Clearly, many of the questions I described above are not going to be answered on day one. But the entrepreneur should do some scenario analysis to figure out whether their business model is plausible. Investors will often ask themselves “what do I need to believe for this business to get to $x in revenue?”. Entrepreneurs should ask themselves this same question, and use the answer to pressure test their business models and see if they might do better by taking a radically different (and perhaps more innovative) approach.
How much money do I need to raise and what milestones will be achieved?
Early stage businesses take many years to evolve, and there are always a lot of open questions. It’s unrealistic to think that an entrepreneur will have everything figured out on day 1. Raising money from investors should be thought of as a staged process. Every time you raise capital, you are selling some portion of your business, so the goal should be to get the most bang for the buck given the capital you have raised. This means really prioritizing the milestones that matter the most for the business and will show investors that you have made rapid progress. You don’t want to raise too little money, because it may not allow the entrepreneur enough runway to handle delays in schedule or prove enough open questions about their business. But you don’t want to raise too much money either, because that could lead to too much dilution and possibly poor focus and execution in the short term.
There are clearly many other things to think about when planning an entrepreneurial company or raising money from investors. Please check out other resources section at www.startatspark.com or follow our blog for ongoing discussion on these and other topics.
Revised Non-Compete legislation doesn't go far enough
My partners and I have been pushing to end the use of employee non-compete agreements for some time now.
We passionately believe in this issue and back in late 2007 I wrote that we should end these non-compete agreements. We planned on starting with our firm and then encourage our portfolio companies, entrepreneurs and other VCs to end this practice as well.
A few months later I wrote a guest post on GigaOm and also we started the Alliance For Open Competition. The idea was to start a grass roots effort to get rid of these things (n.b. we believe in protecting employers through the use of non-disclosure agreements, non-solicitation agreements and intellectual property governed by patent law). We were pleased that in a relatively short period of time prominent investors and entrepreneurs joined the cause and started speaking up.
Recently the Boston Globe Sunday Editorial took on this issue in their column - Clause For Concern.
I was pleased earlier this year when I was contacted by Rep Brownsberger who was leading an effort for reform on this issue. Rep Brownsberger and a team created House Bill 1794 which as orginally drafted would give employees and employers the same protections that exists in California. I participated in a few sessions and was thrilled with the leadership of this bill. As a result our firm, Spark Capital formally endorsed this bill. I have huge respect and admiration for Representative Brownsberger.
Sometime over the last week or so that bill was modified significantly. The revised draft is on Rep Brownsberger’s website. In our view, the revised changes won’t solve the problem in our humble opinion because they simply don’t go far enough to reform and create real change.
Here’s the principle changes they made last week:
1. Employees who make under $50k are free of non-competes. If you make more than that you are subject to a non-compete
2. The revised draft requires that employers give advance notice that they will require non-competes in their offer letter.
3. Punish overreaching by employers by awarding attorney fees to the employee whenever an agreement is reformed or found unenforceable.
* * *
My reaction:
1. I don’t understand or agree with this new threshold of $50k/year. It will leave out plenty of entpreneurs and employees.
2. The advanced notice doesn’t help if every MA company requires non-competes.
3. Point #3 puts a huge risk on the entrepreneur/employee on the expense front. Who wants to fund a lawsuit? Even if it’s frivolous. Legal fees are expensive and they create a chilling effect. Why? History shows the MA companies pursue these lawsuits and MA courts enforce non-competes more than more than other states according to a UCLA study.
4. Ultimately we believe (especially in this market) it is simply unfair that employees are getting laid off and still subject to a non-compete agreement. That is a double whammy. If employees are that important to the company then you should keep them or at least pay them to sit out of the market. (again you are still bound by NDAs, NSAs, etc).
5. Opponents for change say that their business will be hurt by ending non-competes in this state. I respectfully disagree. Our company, Spark Capital, doesn’t have non-competes. It doesn’t hurt us. I dont’ see CEOs of Apple, Google, Facebook, eBay, Intel, Broadcom lobbying to implement non-competes in California. Companies in CA are able to hire the best people they can under the law. That level of open competition is a good thing.
CA companies know that innovation doesn’t happen in a vacuum. Innovation occurs in an open market where competition & interaction exists. I also believe that EMC & Akamai would be just fine if for some reason they one day picked up and moved to California. They wouldn’t be harmed by this issue. EMC just bought CA-based Data Domain for billions. Data Domain was able to be successful because of their technology and because they were able to hire the best people they could. That’s how this works.
6. This state needs bigger and more successful companies. We are limiting our potential by restricting the labor market. Bigger companies will help small and large companies as well in the long run.
7. Opponents for this change also suggest that the lack of non-competes is hurting California. California is certainly having their economic challenges but it’s not because of this issue. Otherwise, CA CEOs would be screaming from the rafters. California has a meaningful revenue shortfall and their expenses are beyond their ability to meet them. But keep in mind, they are creating valuable and growing companies of all sizes.
We will continue pushing for signficant reform on this issue. We hope that this bill continues to evolve and returns to the idea of ending non-compete agreements and at the same time protecting companies with other current legal agreements & laws.
We will continue pushing on the grass roots efforts. If you would like to show your sign of support please blog about this, tweet about it, tell your local elected officials, tell your VC, tell your colleagues and let us know by joining our list of supporters.
Thanks.
