Should I Make My Employees Sign Non-Compete Agreements? (Podcast) | Ep. #063

Elizabeth Larkin, Michael Kelly, and Eric Dollinger

In episode 63, hosts Elizabeth Larkin and Gene Marks answer the question:

“I’m worried that one of my employees might leave to start a competitor business. Is it too late to have my employees sign a non-compete agreement?”

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Transcript

Elizabeth: Gene, what would you do differently today if you were starting your business now.

Gene: Wow, what did you come up with these, are you thinking about this, like slam me with a question like that? Geez. What would I do differently today?

Elizabeth: We like to put you on the spot.

Gene: And that is really, goodness. You didn’t even say good morning or anything. Or welcome us to the show. What I would do differently today if I started my business now, is I would’ve waited a little bit longer to accumulate more capital.

Elizabeth: Really?

Gene: That’s what I would’ve done. Yeah, when I started my business, a lot of people do this, I had a full-time job. I went into business with dad, but he was struggling, and so I was working nights and weekends and balancing a full-time job while trying to build up a client base, and eventually I made the leap and struggled for a couple of years, paying the bills until the business itself got up and running. I just learned that we live in a capitalist society, Elizabeth. And you need capital to start up a business. I wouldn’t have raised money from anybody else, I’m just saying I would’ve worked an extra six months or a year at my other job, and banked it, and then it would’ve been easier, it would’ve been more of a cushion. I would’ve slept better. That’s what I would’ve done differently.

Elizabeth: And you probably would’ve gone directly to a virtual office, right?

Gene: Yeah, I mean, my dad already had an office at the time, so we were just using his. And actually we went virtual when he passed away, that was the biggest reason why. Other than that, it was just costing me too much, it was silly. So, that was back in 2005. Today, having a virtual office, that’s a no-brainer. Definitely, if I’m starting a business in 2017, a service business…

Elizabeth: Yeah.

Gene: I’d have to tell you though, the whole virtual office thing, we’ve had these conversations before but I had a lot of people, like we sell software, I had other colleagues, friendly competitors that sold software in the scene around the country and they would build out training facilities, and they all went bust.

Elizabeth: Really?

Gene: But yeah, they spent too much money on their offices and honestly I can name like half a dozen people that I was competing with back 15 years ago and they’re no longer in the business anymore because they just over… because if you’re in a service business, I think you really, really want to be as virtual as possible.

Elizabeth: Yeah, and you’re not going to have someone over to your home, you go to their business.

Gene: Always. And nowadays in 2017, for me to say we’re virtual, whatever, nobody blinks. Somebody’s all, “I’ll stop by your office,” and I’m like, “Sorry, you know, it’s going to be a tight squeeze into our mailbox that’s in the post office etc., very tight.” And people understand that, they’re like, “Okay, that’s cool, do you want to get together at Starbucks” or whatever. It’s fine. It depends on the business that you’re in. But yeah, I would’ve wanted to have another year’s worth of savings. Capital is good. Money is good. Money is good.

Elizabeth: Now, was it called The Marks Group when it was just your dad?

Gene: No, it was a different company, it was called Demand Systems, Inc. That was my dad’s company and then I started up The Marks Group at that time, to provide services for his clients. He was selling that horrible bookkeeping software that he’d developed, and my company was providing services for the horrible bookkeeping software.

Elizabeth: So if you can’t figure out our software, we also have the-

Gene: We got Gene here, and it was this bookkeeping software that didn’t do the books very well. It did the books, but it didn’t generate a financial statement, and then he would say to clients, “Oh you want a financial statement too, huh? Oh we got Gene over here at The Marks Group. He can come in and do the financial-”

Elizabeth: Have you met my son?

Gene: Yeah, there we go. And they’re like, “What? Shouldn’t you be?” So it was terrible, terrible software.

Elizabeth: Okay. Well on that note, we’re going to be right back with a question about having your employees sign non-compete agreements.

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QUESTION: Should I Make My Employees Sign Non-Compete Agreements?

Elizabeth: Okay, our question is from Sydney in Southern Pines, North Carolina. I don’t know where that is.

Gene: I do not know either.

Elizabeth: Yeah, and she doesn’t say, she or he, but I’m going to go with she.

Gene: Is it with a “y”?

Elizabeth: Yeah it’s a “y.”

Gene: That’s a she.

Elizabeth: Okay. She doesn’t say what type of business she’s in.

Gene: Okay.

Elizabeth: But here’s her question:

“I’m worried that one of my employees might leave to start a competitor business. Is it too late to have my employees sign a non-compete agreement?”

Gene: I don’t believe in non-compete agreements for-

Elizabeth: Why?

Gene: Small businesses. I’ve never seen them work very well. I’ve seen people with non-compete agreements. They leave. You’re running around trying to build your own business, then you get all wrapped up in the soap opera. Sydney’s like, “Oh my god, my employee left. Then she started up a competing business,” and then she’s freaking out about it and she gets all consumed and then, “You had a non-compete, I’m going to sue you,” and then the person sues, and you lose complete focus on your business. You know what I mean?

Elizabeth: It’s also, they’re expensive to enforce.

Gene: They’re expensive to enforce, they’re difficult to enforce. You’re not a large company. And again, if you’re a bigger company, yeah okay I get it, you know what I mean, you have this intellectual property that you want to protect or whatever. But for small businesses, non-compete agreements, in the end, you’re trying to trust people. Sydney, if your employee leaves and opens up a competing business against yours and you can’t beat that employee, you’re not better than that employee, then you’re not better than that employee, what can I tell you. Do you know what I mean? Competition is inevitably going to happen, you can either fight over those scraps or you can focus on what you need to do to grow your business and be better than that competition.

Elizabeth: Yeah, I totally agree.

Gene: To heck with them.

Elizabeth: For me, it would just be the cost. You don’t want to get a lawyer, it’s just too much of a headache.

Gene: And you know what it is, it’s karma. You wind up spending your time… because I know this because I’m a nut. You know, if an employee leaves and goes to work for someplace else, or competes against me, and that’s happened to me, by the way. I get consumed by it. You’re furious, and whatever, that’s bad karma. I’d rather say, “Fine. Go ahead and do what you’re going to do. I’m going to focus my angst on coming up with more brilliant and innovative ideas to make my business better, and I’m going to stomp you into the ground, you cockroach.” That’s the attitude that I would have.

Elizabeth: Okay, so we’re thumbs down for non-compete agreements for small businesses. Are there any exceptions to that?

Gene: Yeah, I mean it just depends on if you have the resources to be able to fight it. And if your property is really- it’s funny when we talk about small businesses, Elizabeth. There are small businesses that are startups that have serious outside funders. They might only have 10 employees but they’ve got VC firms behind them, you’ve got serious intellectual properties, you’ve got serious data-

Elizabeth: Yeah, that’s what I was thinking about, the intellectual property, if you’re developing something new.

Gene: Yeah, and more importantly if you’re looking out for the interest of your shareholders. Like, Sydney it seems like it’s just her business, and she’s just going to get into a fistfight with this woman.

But if you’re running a small business but you’ve got investors and shareholders, like we said, intellectual property, whatever – now it’s a different story. Now you have a fiduciary duty to the others that put money in your business to make sure you’re going through that process and having those agreements in place. Otherwise, they’ll kill you. They’ll fire you. I think that’s the alternative when having a non-compete agreement.

Elizabeth: Yeah. And if you’re not sure, then you should talk to an attorney. They’ll always tell you, “Oh you need a non-compete agreement.”

Gene: Right, right. What we have is, we have employment agreements with our employees, and our contractors, and they have a non-compete clause. I’ve never had to invoke it. I guess one person did go out and open up a place in Jersey near me, and competed against me. But it was really super annoying, but I never sued him. He had a non-compete clause in his contract, but who knows how strong those clauses are. You sit down with an attorney for half an hour, you spend a thousand bucks.

Elizabeth: Yeah.

Gene: You know, I’ve got better things to do with my time, or positive things to do with my time than to go racing after some guy.

Elizabeth: Wait, so you do have non-compete clauses.

Gene: In our employment agreements, a non-compete clause. So, when we hire somebody, and so… in her case, she’s like, “Should I go back to this person and have a non-compete agreement?”

Elizabeth: Oh, okay.

Gene: Now, in her case, if she feels that it’s important and it would make her feel better, she can go back to her employees and say, “Hey listen, you know, we’re starting up, I want to document our relationships. My attorney recommended I do this, or my accountant said I really should be doing this so, here’s an employment agreement.” And then there’s a non-compete clause that’s part of it.

Elizabeth: That’s difficult though, because I worked at a place, a small business, where after I’d worked there for three years they decided to make everyone sign something.

Gene: Yeah and you know, really-

Elizabeth: What are you going to do if I don’t?

Gene: I know.

Elizabeth: I know you’re not going to fire me, I was a key employee there. It was a very small place.

Gene: Yeah. What did you do?

Elizabeth: I actually was transitioning to this job, so I just didn’t sign it because I was on my way-

Gene: Do you think you would’ve if you’d stayed?

Elizabeth: Probably not. I mean, why would I sign something that I don’t have to?

Gene: Yeah. It’s awkward. And again, it’s really hard. We had this conversation on a previous podcast. It’s really hard to undo something that you’ve done. Or haven’t done. You know, it’s hard to pull back an employee benefit, it’s hard to have a relationship with somebody for a few years and then say, “Oh, let’s make this legal now.” It’s like a prenup after you’re married. You know what I mean? So it’s very tough to go back and do something when precedent has already been set. What you can do, is start it now for the future. For example, in Sydney’s case, new employees that she brings on, she should have an employment agreement with a non-compete clause.

Elizabeth: But I generally try to get out of signing anything. Like if I could possibly not sign something, I will not sign, if that’s an option.

Gene: Yeah, that’s not an unreasonable thing. Not an unreasonable thing.

Elizabeth: Even when I adopted my dog, I remember I sent the rescue organization the $350 or whatever, and then they wanted me to sign a contract with them.

Gene: For those of you listening to this podcast, it doesn’t take too long to get into the podcast before Elizabeth brings up the dog. This is a world record now, I think we’ve been talking for what, five minutes?

Elizabeth: I know, I know, it’s crazy. But seriously, it’s really hard to get employees to sign something after they’ve already been employed. And yeah, I do like to talk about my dog. I haven’t talked about your dog in a couple- your mom’s dog.

Gene: My dog is doing great. Yeah, my mom’s. That’s another story for another day.

Elizabeth: Alright, we’ll be right back with Gene’s Word of Brilliance.

WORD OF BRILLIANCE: Woebot

Elizabeth: We’re back with Gene’s Word of Brilliance.

Gene: So, today’s Word of Brilliance is Woebot.

Elizabeth: Woebot?

Gene: Woebot.

Elizabeth: It sounds like a kid saying robot.

Gene: It’s like a robot, except it’s Woebot, it’s W-O-E-B-O-T. It is a product that was created by a team of researchers at Stanford University and it is also a product that is available by a company called Woebot. What Woebot is, it is one of the very first out there. It is a bot, meaning like a software application, that bills itself as a chat therapist.

Elizabeth: Okay.

Gene: So it uses Facebook- we’re talking about all the different ways that we can be using Facebook, it uses Facebook Messenger. And what it does is, when you sign up for the Woebot service, which is like-

Elizabeth: I’m sorry, that word is just ridiculous.

Gene: Woebot.

When you sign up for the Woebot Facebook service, and you start engaging with the Woebot, because you enjoy using the Woebot features, you pay about, it’s like 30 bucks a month, and you chat back and forth with this completely automated bot. And it’s asking you questions about your day, about your life, about all sorts of… Based on the responses that you’re giving, its artificial intelligence algorithms is hearing that, processing it, comparing to answers that other people have given and such, it’s built up as it is, and then coming back to you with other questions and also other advice. It’s acting as a therapist would, if you were sitting in a therapist session.

Elizabeth: So how does this apply to small business owners?

Gene: Well, it’s a very good question. I have a number of small business owners that seek out life coaches, they seek out- I have one- I forget if I’ve mentioned before, but he sees a psychologist every week.

Elizabeth: And rants about his clients.

Gene: Rants about his customers, his job, his home life. It gives him balance or whatever. And he tells me it’s incredibly therapeutic.

Elizabeth: Maybe we should get one in here.

Gene: We could use it. So getting therapy whether it’s with a coach, listen. Billions, you ever watch that Paul Giamatti- the Showtime show, Billions?

Elizabeth: It’s in my queue.

Gene: Yeah, okay it’s great. It’s Paul Giamatti’s wife and Damian, the guy from Homeland.

Elizabeth: Damian Lewis.

Gene: Yeah, Damian Lewis. So Paul Giamatti’s wife, she’s a life coach. She’s employed full-time by Damian Lewis’ company and she provides life coaching services to employees. They want to work out their whatever. Now, these guys at Woebot have come up with a way-

Elizabeth: Oh I get it now, it’s Woebot.

Gene: Woe as in tell me your woes, get it? So they’ve come up with a way to automate it for the cheapskates because maybe you don’t want to spend $150 a week.

Elizabeth: The Gene Marks of the world.

Gene: Correct. So I can get all of my woes listened to by an algorithm or by a bot, who cares? So it’s an affordable way, 30 bucks a month.

Elizabeth: Yeah, but you’re missing out on the body language, the tone.

Gene: Maybe, maybe not. Maybe I’m sitting there and this person is giving me good- you’ve never gotten-

Elizabeth: Someone handing you a box of tissues.

Gene: Well, you’ve never gotten good advice from a friend over email, you’ve never had an exchange on Facebook, whatever.

Elizabeth: Oh yeah, certainly. Yeah.

Gene: Same thing. But this is a trained therapist that’s build on- this is science, Elizabeth.

Elizabeth: It’s a trained therapist?

Gene: Well, it’s a chat bot that’s created specifically for the purposes of providing therapy. Why am I defending the Woebot to you? I’m just telling you that this seems like an interesting-

Elizabeth: In my head I’m already making a list of people I know, including coworkers, who could use this.

Gene: There we go. See, you could potentially be a fan. The idea is not a new idea. There are some other companies that did something similar but this actually is the first application that is really designed for this purpose and is commercially available with the intent of expanding itself. You’re a small business owner, we’re all watching our pennies, we don’t want to bring on a life coach, we don’t want to go and see a psychologist, or whatever, but we wouldn’t mind chatting to somebody about our problems and seeing if I can get some help and release that way. Check out the Woebot, it might be helpful.

Elizabeth: Alright, tell them Gene sent you.

Gene: Facebook Messenger, let me know how it goes.

Elizabeth: Thanks for joining us this week everyone, we’ll talk to you in a couple days.

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