KillHB173: How To Guarantee Another Startup Cluster Never Happens

Many folks around town wax poetic about the good old days when the security cluster was in full boom. It was led by the ISS crew, and spawned lots of companies that otherwise probably wouldn’t have seen the light of day – or had the attention of early stage investors. Among the most vocal proponents of the security cluster is our own Russell Jurney. He’s written on the cluster, and even diagrammed the cluster in his article. The number of people and companies included are a testament to how important this industry segment has been – and continues to be – to Atlanta. Look no further than Purewire or Starpound as examples of companies who are thriving either by acquisition or deep customer traction, respectively.

Well, guess what nasty little Election Day issue would absolutely ‘top kill’ the cluster concept? Yep, the Georgia Restrictive Covenant Act (HB173) seeks to massively tighten the non-compete laws in Georgia. Let's look at a hypothetical exmaple with a real-life guy. (Thanks in advance for the indulgence Paul.)

Imagine being a guy like Dr. Paul Judge (who we interviewed at the ATDC Startup Showcase) in this future world. Having been a C-level executive at CipherTrust, there surely would have been a non-compete in place that could limit him for up to five years based on the merger with Secure Computing. Given that merger happened in 2006, it’s perfectly reasonable to think Purewire wouldn’t have been founded in 2008. And fast forward to Q4 2009 when Barracuda Networks acquired Purewire. Yep, you guessed it: this ugly new HB173 world would have had a brand new non-compete on Paul that could lock him out for another five years.

So there’s one simple example of a brilliant technical guy who’s been an innovator inside the security cluster for at least 10 years. Under the new HB173 world, Paul would have been seriously slowed down – if not stopped – from continuing to create great companies and jobs. Oh, and tax revenue.

The other example that should scare the wiz out of Atlanta is the emerging cluster of video game companies. And the complete irony is this cluster enjoys more State of Georgia support than most industries via the Georgia Entertainment Industry Investment Act. So what the Georgia Legislature giveth, they also taketh away? If you have any doubt about the density of this cluster, check out this map. And can’t you just imagine the IP arguments wrapped around a field as utterly creative as video game designers? The reality is the litigation would be so complex that the average designer or developer could never expect to afford to assert their employment rights without footing huge legal bills.

For what it’s worth, I’m not a fully sold proponent of the cluster mentality given my theory that investors love them because it further drives down risk by leveraging experienced entrepreneurs and – at least to some degree – incremental businesses. But clusters do serve one very critical function: they draw a strong peer group of employees and executives – both from our own educational institutions and transplants from across the country. There are more than enough firms to support a vibrant and thriving gaming industry – even if Rob Kischuk is the only one I ever see around town :-) But imagine how quickly the ability to move between firms would evaporate if HB173 becomes law.

So if my logic holds, then no angel or VC should support HB173 given it puts a huge chill on additional companies in similar industries, correct? I’d love to hear some investor feedback on the topic…



-1 # Dan Myers 2010-08-30 11:53
Maybe it's just me but I find this position a bit ironic. I would have thought investors, particularly VCs, would be in favor of such laws. After all, some of their first steps are to lock everyone down with non-competes, not just C-level. And, they spend mucho dinero on legal services to get there. This could be a serious approach/avoidance dilemma, no?
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0 # GFRRTDEFF 2010-08-31 02:55
It's a "risk-mitigation strategy" right up until the point that the smartest employees won't sign them – or co-founders choose an investor based on their terms & conditions. This might be yet another example where a pro-entrepreneur super-angel like Ron Conway or Dave McClure could differentiate versus VC money.

While I can certainly understand some level of employment agreement with key employees – even including reasonable non-competes – the precedent set by HB173 is downright dangerous. Not selling to previous clients for six months: cool. Don't work in the industry for 2-5 years after being terminated without cause: a crock.
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+1 # pfreet 2010-08-30 14:04
I was at a meeting recently where the new cluster maps were discussed, such as the one on gaming you reference in the article. These are tremendously valuable tools.

One value the maps provide is in recruiting companies to Georgia. Show them the map and tell them that we have a vibrant cluster of companies for them to recruit talent from. HB173 negates this value. You will have a hard time recruiting key employees in Atlanta because they will be tied up in employment agreements. Maybe you're better off locating to California where they don't have such restrictions?

Another great value is for existing companies in the cluster to use the maps to recruit key employees who don't live here to consider moving to Atlanta. If things don't work out, there are other companies where you can go. Unfortunately you'll have to find something else to do for two years. Maybe you're better off staying where you are?
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0 # patrick.nickles 2010-08-30 18:19
5-yr non-competes would strangle startup innovation. Many companies are founded by experienced executives, not just because of the opportunity a startup affords, but because the person feels crushed by the bureaucracy of their current employer. This person is not going to 'stay put' just because of a non-compete. Top performers WILL go where the best opportunity lies. A recent topic of debate has been 'SV vs ATL'. Does Georgia really want to FORCE the brilliant risk-takers who live here to move elsewhere?

In my humble outsider's opinion (having only been in Georgia for 3 years and knowing almost nothing about the actual content of HB173) support of this initiative would seem to be one more example of local investors/corporations trying to mitigate risk which could/would actually hurt their opportunities for future investment. While I'm thoroughly impressed with the entrepreneurial / startup culture here I cannot say the same about what seems to be an absurdly risk-averse investment community. (Yes, I know this statement is going to raise local-investor hackles.)

Simply put, I would hate to be forced to try to bring in a superstar from a less-restrictive state to join my firm and say "Oh, btw, I need you to sign this 5-yr non-compete". That would be the end of the conversation with most people worth having.

Restricting individual freedom in this manner is rarely a good idea.
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