EMC’s defense of employee noncompetes stunted growth of startups

EMC chairman and CEO Joe Tucci.Oracle PR via Flickr

No disrespect to EMC Corp., in the midst of being gobbled up by Dell for $67 billion. Its founders and employees created a true pillar company here in Massachusetts – one that set the agenda for the data storage business for more than 35 years, and made some very smart acquisitions.

But EMC also grew to become the staunchest defender of employee noncompete agreements. Those are the contracts that many workers and executives sign that prevent them from leaving to join – or start – a competing firm for a set period of time, often a year. They’re used in many states, but not in California. A sustained effort to ban their use, or at least limit it, hit a wall on Beacon Hill last year.

As local and state legislators worry about the layoffs that could follow the Dell-EMC combination, I think they instead ought to use this as a “teachable moment,” and alter the way Massachusetts allows companies to use noncompete agreements to lock in employees. EMC’s stance was in the best interest of EMC; it discouraged EMC’s best people from striking out on their own. But it also inhibited the growth of a strong storage and data management ecosystem here.

“Such a huge company with so many employees has set the tone and the culture in Massachusetts,” says Ellen Rubin, co-founder of the Boston data storage startup ClearSky Data. “It affected all of the boiler-plate letters and contracts that people use, and it affected the way in which people here think about things. People see noncompetes as a serious issue – that they will be enforced.” That, Rubin says, creates a chilling effect when any employee thinks about changing jobs or starting a company of their own.

Venture capitalist David Skok, a startup investor at Matrix Partners in Cambridge, says he can recall being pitched “seven or eight times” over the years by EMC employees who wanted to start their own venture. “We saw people who had ideas, and who might’ve pursued them, but they couldn’t because they would’ve had to wait a year [until the noncompete elapsed], or risk being sued or threatened,” Skok says. “We ended up having them back out of starting things.” Among its highest-profile suits over an employee who signed a noncompete agreement was a 2001 case against Doron Kempel, who left to become CEO of a storage startup – until a judge ruled that he couldn’t do that.

But Skok says he also has been in recruiting meetings where names came up, and the response was “we can’t go after so-and-so, because EMC will come after them” to enforce a noncompete.

I think we’d be in better shape if EMC had spawned dozens of splinter companies over its lifespan, or its alumni had contributed to the growth of more startups, rather than having built the perfect airtight Tupperware container for talent. While there are other data storage and management startups around Boston, some of them employing a good number of EMC alumni, Skok’s experience – and my gut – tells me that without noncompetes, we’d see a lot more. In California, a single company founded three years before EMC had its alumni go on to start Electronic Arts, LinkedIn, Palm, Android, Flipboard, Electronic Arts, Path, and Nest. That company? Apple.

“It is in our collective best interest to think about building a tech ecosystem, not pandering to the interest of a few employers, even if they’re very big,” says C.A. Webb, a co-founder of the new venture capital firm Assemble VC, and the former executive director of the New England Venture Capital Association, which has lobbied to ban noncompete agreements. “Even the strongest mighty oaks – Polaroid, Digital, EMC – at some point they usually die. It may take 30 years, or it may take 50. But EMC very forcefully precluded a storage ecosystem from generating.” (I reached out to EMC today for a comment, but haven’t yet heard back.)

Rubin says that it isn’t impossible to hire people from EMC, but that there’s a risk in doing too much of it. “One or two isn’t a big deal, but try to hire 10 or more and you worry about the legal risk,” she says. But for a fast-growing startup that has launched its product and is moving into marketing mode, there can be a benefit in hiring people quickly, and bringing on people who have had experience in big companies. “That’s where you want the people who have experience with scale,” she says.

It’s almost impossible to prove that we’d have a more robust cluster of companies focused on storage and data center needs if we’d ditched noncompetes the day before EMC was founded in 1979. And of course it’s possible that EMC wouldn’t have grown to 70,000 employees (roughly 10,000 of them in Massachusetts) if it had had to deal with a constant trickle of talent leakage and scrappy startups nipping at its heels.

But we’ve now run the experiment one way, and seen an industry leader humbled by the pace of change in its industry, as companies have shifted their data from their own data centers into the cloud. Why not run it the other way, and see if more fluid movement of talent in a range of fast-evolving industries would produce a more diverse garden, rather than just a couple very big sunflowers.

“There’s no question in my mind that because we made it harder for people to leave a company that was in the midst of being disrupted” — EMC — “that other people elsewhere in the country and the world started companies that were accelerating that disruption,” says Jeffrey Bussgang, a partner at Flybridge Capital Partners in Boston. He adds that the current system is perfectly designed “if you want to miss waves of innovation.”

As I’ve written before, the message of the noncompete status quo is, “We know there will be competitors to our company. Just let’s make sure they’re not based in Massachusetts.”

If you acknowledge that we’re living in a global economy, that doesn’t make a whole lot of sense. Governor Charlie Baker, during his campaign and since his inauguration in January, hasn’t taken this issue seriously.

This would be a good time to start.