Monday’s FTC announcement regarding the nationwide, retroactive ban on enforcing employee noncompete agreements holds the promise of enhancing wages, career opportunities, and innovation. However, with a legal challenge already mounted against the agency’s authority, it’s crucial to explore the additional, perhaps overlooked, benefits that could emerge if the ruling is upheld.
Entrepreneurship is a vital driver of job growth, creativity, and prosperity, yet women remain significantly underrepresented among startup founders. With less than 20% of venture-capital-backed companies having even a single woman on their founding team, the gender gap in entrepreneurship persists as a pressing issue. Surprisingly, noncompete agreements exacerbate this gap, despite gender neutrality in their wording. Through analyzing confidential Census and IRS data, we gain insights into the broader population dynamics at play.
Firstly, women often initiate startups earlier in their careers and historically earn less than their male counterparts in the same field. Consequently, they face greater financial vulnerability when confronted with the prospect of a noncompete lawsuit.
Secondly, the inherent risk of startup failure is compounded by noncompete agreements, which hinder entrepreneurs from leveraging their prior industry experience. Research in economics and psychology suggests that women, generally more risk-averse, are deterred from entrepreneurship by the added legal risk posed by noncompete contracts.
Thirdly, noncompetes impede startups from recruiting skilled talent, particularly in states where such agreements are strictly enforced. This talent shortage diminishes the prospects of startup success, with women experiencing harsher consequences for failure, including lower post-startup employment wages compared to men.
Given these factors, noncompete agreements dampen the entrepreneurial aspirations of women, who fear legal repercussions for themselves and potential hires. Notably, female founders are less inclined to expose former colleagues to litigation risks in states with stringent noncompete enforcement.
While opposition from established companies fearing employee departures is expected, the FTC report highlights alternative protective measures such as non-disclosure agreements and trade-secret litigation.
Noncompete agreements, favoring established entities and men over startups and women, represent a blunt tool in the entrepreneurial landscape. Implementing the FTC’s ban on noncompetes holds the potential to narrow the gender gap in entrepreneurship and stimulate the startup ecosystem sought after by policymakers worldwide. This aspect of California’s Silicon Valley offers a replicable model for fostering innovation.
Matt Marx, the Bruce F. Failing, Sr. Professor and Faculty Director of Entrepreneurship at Cornell University, whose research focuses on noncompete agreements and their disproportionate impact on women, provides valuable insights on this issue.
