FTC's Proposed Non-Compete Ban: What It Means for Innovation and Startups

Yesterday, the Federal Trade Commission (FTC) voted to ban nearly all non-compete agreements. While this rule will certainly be subject to legal challenges, Outrigger Group believes this is a huge step toward aligning the incentives of employers with their personnel. Moreover, this ban will foster innovation, help hashtag#startups and small businesses, and empower fractional executives to accelerate the growth of the entrepreneurial ecosystem.

Our team has a lot of experience with non-compete agreements, having been required to sign non-competes, and at times refusing to sign non-competes. We’ve spent countless hours (and substantial legal fees) back and forth to narrow the language of non-competes, and at various times been on the employer side of the table requesting that personnel sign a non-compete clause as part of a standard invention assignment agreement. That is to say, our team has seen all sides of this equation.

The two most commonly referenced benefits of non-compete agreements are:

1. Mitigate the risk of intellectual property (IP) leakage. 

2. Companies make significant investments in training personnel without a non-compete, non-competes make it difficult for a competitor to poach that talent.

The IP leakage problem can largely be solved with confidentiality and IP assignment agreements. Similarly, the personnel retention problem can be solved with vesting equity that aligns incentives for personnel to remain with the company, so long as the equity is accruing value.

In addition to the opportunity for employers to utilize the carrot (equity incentives) as opposed to the stick (non-compete agreements), the biggest benefit of eliminating non-compete agreements will undoubtedly be the opportunity for innovators to become entrepreneurs without fear of overbroad interpretations of what “competes” with their former employer.

At Outrigger Group, we believe starting a business is a noble act. It takes courage, initiative and a lot of hard work. Having to deal with legal fees fighting a former employer discourages innovation and slows the growth of the entrepreneurial ecosystem, and the economy more broadly. To be clear, we are in no way advocating for innovators to breach confidentiality agreements or violate intellectual property protections, but personnel should be free to pursue their passion without fear of reprisal.

These brave entrepreneurs need great guidance from experienced executives who can slot into fractional roles. One of the major challenges faced by fractional executives has been non-compete agreements. With this barrier gone, a growing number of entrepreneurs and executives will likely move into the fractional space, which will be a huge benefit to startups and small businesses. These talented individuals can spread their time across multiple companies, contributing precisely what companies need without breaking the bank, and often long before companies can justify the expense of a qualified full time hire.