Warning that restrictive non-compete agreements are contributing to a tech talent exodus from Massachusetts, Onshape CFO Dan Shore asserts these contracts pose a deeper fundamental problem for companies.

“Non-competes assume employees are bad actors,” Shore told Beacon Hill legislators yesterday at a hearing on non-competes. “The goal of these provisions is basically to infect employees so they won’t be desired by competitors and they won’t be desired by investors. These are the same employees from whom we seek maximum loyalty, engagement and effort.”

“What kind of social contract is that? Trust us, even though we don’t trust you?” he added.

Shore (pictured above with ClearSky Data CEO Ellen Rubin) testified before the Joint Committee on Labor and Workforce Development, which was seeking community input on bills that would ban non-compete agreements statewide for workers in every industry. Currently, the only states that outlaw non-competes are California, Oklahoma and North Dakota.

Sponsored by state Sen. Will Brownsberger (D-Belmont) and Rep. Lori Ehrlich (D-Marblehead), “An act relative to the judicial enforcement of non-competition agreements” (SD809 & HD2332) would forbid any oral or written agreement that “prohibits, impairs, restrains, restricts, or places any condition on a person’s ability to seek, engage in, or accept any type of employment” after a job ends.

Onshape unilaterally eliminated non-compete agreements for its employees last month, despite the fact that the rest of the CAD industry widely uses them. Non-compete agreements legally bar workers from seeking jobs in the same industry for a year or longer after leaving a company. In some cases, this even applies to workers who are laid off.

Harvard Business School lecturer and venture capitalist Jeffrey Bussgang says 85 of 100 students in his entrepreneurship course chose to leave Massachusetts after graduation.

The legislative hearing attracted a standing-room-only crowd of business leaders, venture capitalists, entrepreneurs and academics, most of whom argued for a ban on non-competes. The sole voice of dissent came from Mark Gallagher of the Massachusetts High Technology Council, a trade association that includes some of the region’s larger employers.

Large employers are more likely to embrace non-compete provisions as a way to maintain a competitive advantage over startups. Because these companies have more to lose, they are more willing to pressure their employees into signing non-compete agreements. Some of the most passionate pleas in favor of banning non-competes came from venture capital firms, who have an obvious stake in the success of smaller companies. Paul Maeder, a founding partner of Highland Capital Partners, warned that the Massachusetts economy will become one “big dead tree” if it doesn’t keep nurturing many small saplings.

Gallagher said that non-compete agreements are important tools for companies to protect their trade secrets. Advocates of getting rid of non-competes argued that other protections, such as non-disclosure agreements (NDAs) and non-solicitation agreements, already cover this concern.

A Non-Compete Ambush?

Matthew Marx, a professor of entrepreneurship at the MIT Sloan School of Management, urged state legislators to require companies to tell prospective hires about their non-compete agreements up front – regardless of the fate of the current bills. In his American Sociological Review study of 1,029 engineers randomly selected from multiple industries, the professor found that 70 percent did not find out they had to sign a non-compete until after they accepted the job.

“In my view, that’s an ambush,” he said. “Frankly, until we make some progress on this, I don’t think I have a choice but to recommend to my students that they go to California (to seek employment or start a company).”

Harvard Business School senior lecturer Jeffrey Bussgang, who is also a general partner at Flybridge Capital Partners, testified that his entrepreneurial management students are hearing similar advice. So far, 85 of his 100 most recent graduates have left Massachusetts.

“We are in the midst of a terrible talent war,” Bussgang said. “You can’t change the weather, but you can change this one bill. It doesn’t cost us anything and it will have an enormous positive economic impact.” In a letter to the committee, Bussgang warned that his students may view Massachusetts as “a closed community dedicated to ‘yesterday’s era’ of DEC, Prime and Wang.”

“We want them to think of the New Massachusetts – an open, inclusive, diverse and dynamic community full of exciting entrepreneurial communities and a culture that is welcome to all,” he wrote.

At the end of the hearing, C.A. Webb of the New England Venture Capital Association, announced the formation of a new organization devoted to eliminating non-competes in Massachusetts. The Fair Employment Alliance, she said, will recognize companies that have abandoned the agreements and help workers who are negatively impacted by them.

Though there are certainly other economic factors at play besides non-competes, notable high-tech giants that were launched in Massachusetts but moved to Silicon Valley to grow include Facebook and Dropbox.

To read Dan Shore’s full letter to the Joint Committee on Labor and Workforce Development, click here.