VentureBeat

I’ve been watching the debate raging over the past five days about non-compete agreements, those clauses in employment contracts which forbid an employee to go work for a competing company.

It’s time to weigh in favor of getting rid of them.

Venture capitalist Bijan Sabet kicked off the debate, saying his venture firm Spark Capital is going to stop requiring them from the companies he invests in, and calls for other companies to drop non-competes too. He argues they do more harm than good. His statement grabbed attention, because Spark is based in Boston, where non-competes are legally enforceable. In California, they are not.

Venture capitalist Fred Wilson disagreed, saying non-competes are good and necessary because they stop employees from fleeing with core intellectual knowledge and crippling a company by taking it all to a competitor. What followed was largely an anecdotal discussion, until Mike Masnick kicked in last night, saying he’d done the research, and it pointed to overwhelming evidence suggesting non-competes are the predominant factor for why Silicon Valley emerged as a more dynamic economic region than Boston. All things considered, non-competes are bad because they set up an artificial barrier that disrupt innovation, causing stagnation for the companies themselves and the region around them:

In order to understand how this makes sense, just think of noncompetes as the “DRM” of human capital. Just as DRM tries to restrict the spread of content, a noncompete seeks to restrict the spread of a human’s ideas for a particular industry within the labor arena. Both concepts are based on the faulty assumption that doing so “protects” the original creator or company — but in both cases this is incorrect. What it actually does is set up an artificial barrier, limiting the overall potential of a market. It may not be easy to see that from the position of the content creator or company management (or investors). It’s natural to want to “protect,” but it’s actually quite damaging.

Now, Masnick has consistently used his Web site, Techdirt, to tirade against barriers to free markets, and so is predictably critical of non-competes, just like he’s consistently scathing of the music industry’s embrace of DRM and of abuse of patent laws by companies seeking to shield themselves from competition. As in most cases, he’s right: A non-compete clause is another artificial barrier to free exchange of labor and ideas in the market place, and causes an employee to feel trapped, and to stagnate.

As other people have pointed out, maintaining strict non-disclosure agreements and confidentiality with regards to trade secrets and intellectual property is good enough. Those are also enforceable within California, and should be enough to do the job in protecting value that is rightfully the company’s. Dropping non-competes doesn’t mean employees are free to do as they please. Free movement is one thing, but the ideas you carry with you are another. See the very useful column, “How to leave a company and not get sued,” written for VentureBeat by lawyer Todd Rumberger about this. He provides an extensive discussion of what employees in California must consider before leaving a company. He makes clear that we’re still very far removed from any sort of “wild west” when it comes to intellectual property transfer — even without non-competes.

But do read Masnick’s piece, which winds from AnnaLee Saxenian’s 1994 book Regional Advantage which explains how Silicon Valley beat Boston’s Route 128, to Ronald Gilson’s work on the legal differences between the two places regarding non-competes, to research from the Federal Reserve and the National Bureau of Economic Research, that backs this up with Job Hopping in Silicon Valley, and finally the case-study of Michigan that also supports the findings.

Here’s the latest action:
1) Warner CEO praises Apple, DRM-free music
2) VMWare is after your engineer blood
3) Berners-Lee warns of walled gardens
4) Microsoft completes $47M acquisition
5) Another VC speaks in favor of taxing himself
6) Joost rolls out new ads
7) Billeo raises $7M for easy payment

Warner Music CEO now supporting DRM-free music, iTunes – “We used to think our music was perfect just the way it was … of course, we were wrong,” said Warner Music CEO Edgar Bronfman at a recent conference. The media chief is now singing praises for iTunes and Apple, and the Warner online music store has also begun selling DRM-free tracks. These supportive comments and others from Bronfman, who just a few months ago was spouting rhetoric against online music sharing, may herald the way to a new era of cooperation between record labels and online retailers.

Silicon Valley engineering talent getting ever scarcer – VMWare is prepared to battle it out with Facebook and Google for the Valley’s top engineering talent, according to GigaOm. Combine the boom in the number of local startups with the growing companies’ endless thirst for talent, and you’ve got serious shortages — all the more reason to relax H1-B visa rules for skilled workers from other countries.

Microsoft closes $47M MusicWave acquisition – The Redmond giant paid $47 million for the French mobile music company. Not a bad deal, when compared to the $121 million that Openwave paid for the same company two years ago.

Yet another VC backs VC tax – First it was Fred Wilson. Now it’s another one, though with smaller name. William Stanhill of Trailhead Ventures testified in front of Congress that the carried-interest tax rate should go up, against the objections of his partners. The bill passed Congress, but will reportedly be be blocked in the Senate. Stanhill is unapologetic; of course, at the age of 71, he has every reason to be straightforward, and even calls himself a “depreciating asset.” Score one for the “nothing to lose” crowd. For more on why VentureBeat thinks the tax should pass, see this post.

Joost gets creative with the ads – A new “advertising widget” called Coke Bubbles has debuted on Joost, which has so far only run pre-roll ads on its videos. Advertising advocates are pushing for more creativity online, and that’s what Joost appears to be after. Whether the widget is particularly creative is another matter; it’s essentially a video sharing app with Coca-Cola branding. The reception in the blogosphere was lukewarm at best, with CNET’s Caroline McCarthy comparing it to “those Pop-Up Video shows that VH-1 did back in the ’90s, except not quite as customizable.” Ouch.

Berners-Lee speaks out against walled gardens in the mobile space – Mobile phones are in danger of being locked into walled gardens, says Tim Berners-Lee, one of the inventors of today’s Internet. “An open platform means using standards,” Berners-Lee said. “The mobile internet must use the same standards as the Internet.” More from the New York Times here.

Billeo raises $7 million for online payment – Billeo offers online bill payment software for use by consumers and small businesses. It assists by auto-filling forms for online shopping, offering single-password logins, saving receipts, and helping organize finances. The funding is the Santa Clara, Calif. company’s second, and was led by ATA Ventures. Altos Ventures, Claremont Creek and the Pacifica Fund also participated.

1) Rumor: Google to buy Sprint?
2) The U.S. House of Representatives passes VC tax
3) Berkeley Bionics brings exoskeletons to market
4) Fox Interactive Media may start its own ad network
5) Railpower Technologies to steam on, for now
6) Zuckerberg, speaking grandly
7) Are Facebook’s ads illegal in New York?
8) Murdoch calls Facebook a phonebook
9) Sprint and WiMax startup Clearwire have ended plans to form a joint venture

Rumor: Google to buy Sprint? – The rumor surfaced yesterday, here, suggesting that despite a number of major issues, owning a carrier would give Google crucial control over developing and distributing its own mobile services. The issues, however, are numerous. Google would have to beef up its governmental lobby arm to compete against AT&T and other carriers for favorable regulations. It would also have to manage retail stores for mobile customers (expensive, although they’ve worked for Apple!). The move might also send the message to AT&T and the others considering the Open Handset Alliance that Google is actually going to compete directly against them, regardless of the Open Handset Alliance that Google is spearheading. Om has more about how this move could make sense for Google, Intel, Cisco and other leading Silicon Valley companies.

The U.S. House of Representatives passes VC tax — It will change the carried interest from a capital gains to ordinary income, thereby lifting tax to about 35 percent on VCs and other private equity professionals. It is not expected to pass the Senate, however, and President Bush has suggested he would veto it.

Fred Wilson’s series on the struggling VC industry – Venture capitalist Fred Wilson has a good series of posts about the rise and fall of the VC industry, and explains how the official data VCs report may look better than reality (because poorly performing firms have decided not to report their data, or are shutting down and so can’t report their data), and that even top performing firms in the industry aren’t doing that well. It suggests the VC industry is in for some serious pain.

Berkeley Bionics brings exoskeletons to market – It provides technology to give you extra muscles, and plans to augment human strength in places like the war zone (for military) or other emergency situations (firefighting, and so on). This system provides its pilot with the ability to carry loads up to 150 pounds on his back “with minimal effort” over any type of terrain for extended periods of time without reducing his agility. The company is a spinout from the Berkeley Robotics and Human Engineering Laboratory and is raising funds. Via Alarm:clock.

Zuckerberg, speaking grandly – “There is no opting out of advertising,” Zuckerberg said of Facebook’s new platform last week, “Once every hundred years media changes. The last hundred years have been defined by the mass media. The way to advertise [then] was to get into the mass media and push out your content. That was the last hundred years. In the next hundred years, information won’t be just pushed out to people, it will be shared among the millions of connections people have.” Via TechCrunch.

Fox Interactive Media may start its own ad network – FIM may be planning to begin providing advertisements, as well as living off of them. Company representatives have been making the rounds to gauge the interest of outside media sites in showing ads provided by Fox, according to the Silicon Alley Insider. Of course, FIM may be large enough to create its own ecosystem: The company runs AskMen, Fox.com, Dow Jones, Myspace and several other giant media properties. We’re not sure if it’s connected, but we also recently reported on FIM hiring a consulting company to streamline its ad operations. Maybe the advice was, “Go forth, and build your own.”

Railpower Technologies to steam on, for now – The fires were flickering for Railpower, a maker of hybrid locomotives, but the Ontario Teacher’s Pension Plan decided to step in and keep the engines running. The fund put $35 million into the cleantech train company, noting that it expects that “increasingly stringent environmental regulations in North America and globally will open up new markets” for clean rail startups like Railpower.

Are Facebook’s ads illegal in New York? — That’s what the New York Times is saying, citing a 100-year-old New York State statute which says that “any person whose name, portrait, picture, or voice is used within this state for advertising purposes or for the purposes of trade without the written consent first obtained” can sue for damages.

Murdoch calls Facebook a phonebook –”The two platforms are very different in the user experience,” said Rupert Murdoch, head of News Corp. and owner of MySpace, the competitor to Facebook. “MySpace is a place for self-expression, where users’ MySpace pages become their home on the Internet. It is where they discover people, content, and culture — where they share information, communicate, and consume. Facebook, on the other hand, tends to be a web utility, similar to a phonebook.” Via ZDNet.

Sprint and WiMax startup Clearwire have ended plans to form a joint venture — WSJ has details.

Private Equity Week’s Dan Primack has a good follow-up on the debate about the new tax for venture capitalists and other investors.

A public backlash against these investors is encouraging politicians: The extravagant ways of Blackstone, the buyout firm that that just went public and where leaders were feasting on $300 stone crabs, haven’t helped. The tax proposal is gathering momentum.

And while most investors are upset about the tax, New York venture capitalist Fred Wilson (pictured left) says the tax is justified:

I strongly believe that long term capital gains should be taxed differently than short term capital gains. And I also strongly believe that capital gains should be taxed differently than ordinary income. The counter argument is that the economic incentives to take risk with your capital should be enough and you don’t need additional tax incentives. I don’t buy that. Human nature being what it is, most people are going to want to be conservative with their capital. Taking a risk with your capital, particularly on new business initiatives (whether its a new restaurant in the neighborhood or a cure for cancer), is something we need to encourage. And many of the developed countries in the world agree. In some countries, capital gains are not taxed at all. I don’t think we need to take the economic incentives that far.

But, and this is a big but that will annoy most if not all of my colleagues in the VC and private equity businesses, if you are generating those gains with other people’s money (OPM), then that is a fee you are being paid and it should be taxed as ordinary income. I really don’t see how anyone can argue otherwise with a straight face.

If congress is successful in taxing carried interest as ordinary income, it will massively increase the amount of taxes I pay. So be it. Someone has to pay the taxes to keep our troops equipped, our borders secured, our schools modernized, and our children healthy. It might as well be me and my wife.

Meanwhile, here’s the statement by Mark Heesen, president of the National Venture Capital Association (NVCA), which represents 480 venture capital and private equity firms:

The Bill proposed today by House Democrats to change the taxation of carried interest from a capital gains rate to an ordinary income rate is extremely concerning to the venture capital community. We assert that carried interest in the venture capital business model is a true capital gain and should continue to be taxed at that appropriate level. This proposed legislation could have far reaching, negative implications for the start-up community, venture capital investment, and the US economy. It is critical that legislators identify and fully comprehend the unintended consequences of this proposal as it could impact one of the country’s most important economic engines. We look forward to continuing a dialogue with members of Congress on this issue as the legislative process continues.

Another concern is how these VC and other partnerships will respond to such a tax. Some may try to exploit loopholes that let them move their entities offshore but continue to invest here, for example. Experience has shown that you can’t just levy a tax and expect a corresponding increase in receipts. Congress should keep this in mind, and raise taxes only in a way that doesn’t mean a decline in tax revenues as a result.

The latest in the world of start-ups and venture capital:

Fred Wilson sells home listed at $37.5 million — Fred Wilson, the venture capitalist at Union Square Ventures in New York, who has one of the most widely read VC blogs, AVC, has sold his 15,000-square-foot townhouse in Manhattan. If it closed near the asking price, the 1847 mansion would be the most expensive single-family residence downtown, reports the Observer. In 1996, the home apparently sold for $3.9 million.

In this video, found via Alex Haislip at PE Week, Wilson tells WallStrip: “I went from basically being penniless to having more money than I knew what to do with,” referring to the $3.6 billion sale of Geocities to Yahoo in 1999. Haislip suggests the slimmer pickings lately for Wilson (his Del.icio.us investment was sold to Yahoo for a mere $30 million) may be one reason Wilson put his house on the market. We’re not sure about this, so VentureBeat emailed Wilson for comment. He declined comment.

Don’t have friends commenting on your blog? — Not too late to hire FakeYourSpace, which lets you choose from a selection of ‘models’ to leave you customized comments to look like you have (sexy) friends and are popular online. The basic service is $1.99 month, but they’re offering special of 99 cents a month.

Mojungle for sale on eBay — Mojungle, a site that lets you deliver photos and video to blogs and web sites from your mobile phones, has listed itself on ebay for $60,000. It lets you deliver via SMS, MMS, email, but that’s not enough to lift it above all the competitors out there doing similar things (Shozu, Veeker, Mywaves, etc).

MobiTV, making headway — MobiTV has quietly becoming the wireless television delivery for most major carriers - Sprint Nextel, Cingular, and AT&T, and now apparently Comcast. Now we know why it has raised $100 million — these are huge clients and it had better deliver.

Edgeio expands real estate search — More info here, and how it follows from its acquisition of ARES.

Now that Google has snapped up hot video site YouTube, everyone is piling on Yahoo, which is supposed to be Google’s competitor.

They’re criticizing Yahoo for being too slow. The NYT cites an advertiser saying clients are taking out fewer ads on Yahoo, preferring hipper sites like MySpace. There’s the WSJ, saying Yahoo’s negotiations to buy college social networking company Facebook (as previously reported) aren’t going anywhere, and that it has fewer reserves than Google to pull off these acquisitions. Its stock price has fallen, making it poor. Even one of Yahoo’s biggest fans, venture capitalist Fred Wilson, has sold off his Yahoo stock. In recent months, Wilson had championed Yahoo on his blog, in part because it had bought Del.icio.us, a company he’d invested in.

Click on image here to take you to a list of the most recent Internet acquisitions. Google is well represented.

VentureWire (sub required) has a good discussion of valuations: Google paid about $23 per YouTube unique visitor, 10 cents per trailing 12-month page views and 10 cents per trailing 12-month minutes of use. In comparison, Google trades at 14 cents per trailing 12-month page views and 37 cents per trailing 12-month minutes of use.

Finally, the NYT’s Miguel Helft has a good anecdote about YouTube’s oft-forgotten third founder, Jawed Karim, who went off to study at Stanford, relinquishing some of his riches at YouTube, and even Stanford professors couldn’t seem to understand why. The fun part was when Karim took Helft back to his pad and showed him a video of co-founder Steven Chen complaining — as recently as April of last year — that YouTube’s had a mere 50 videos.