The Wisdom (or Not) of Non-Compete Contracts Here are some things to consider before hiring your first salesperson.

By Ray Silverstein

Opinions expressed by Entrepreneur contributors are their own.

Companies use non-compete contracts to protect their interest and restrict ex-workers from capitalizing on contacts or information obtained during their employment.

Typically a sales-specific non-compete contract says that, should a salesperson leave the company, he or she cannot take the employer's clients with him/her. The contract restricts the salesperson from doing business with clients for a specific period, usually a period of two or three years.

Sounds logical, right? After all, you've worked hard to build your client base, and you have every right to protect it.

The problem is non-compete contracts offer several drawbacks. For one thing, they aren't popular with savvy salespeople who may be reluctant to sign them. As a result, you may have trouble finding the kind of salesperson you want.

Furthermore, such contracts are very difficult to enforce after-the-fact. It's not like you can follow your former salespeople around and monitor their activities. And even if you did have proof that someone violated the contract, do you really want the hassle-and bad press-of taking a former employee to court?

The reality is non-compete contracts don't always fare well in the courtroom. Every state has its own definitions of what a fair contract looks like. Some states strictly limit such contracts; in California, they're prohibited altogether. In the past, non-compete contracts have been viewed as standing in the way of an individual's right to earn a living.

So if you're going to insist on a non-compete contract, make sure it's in strict compliance with state law.

But before you pick up the phone and call your attorney, consider an alternative arrangement. Instead of a non-compete contract, how about a 300 Percent Compete Contract?

Under the 300 Percent Compete Contract, ex-salespeople have the right to take your clients with them. The catch? They must pay you for the privilege, and pay you handsomely-300% of the client's lost annual billings, to be precise.

A number of entrepreneurs in my group advisory boards have implemented this concept, and they report good results. For one thing, salespeople are less reluctant to sign them. For another, they're infinitely easier to enforce. After all, it's easy to determine the actual financial value of a client's billing. In addition, it alleviates a fair amount of the emotional turmoil triggered by these situations.

Look at it this way: If an employee-and a client-want to leave you, you've pretty much lost them already. But instead of clutching a damp hankie, you'll have fistfuls of dollars to dry your tears. Which would you prefer?

Ray Silverstein is the president of PRO: President's Resource Organization , a network of peer advisory boards for small business owners. He is author of two books: The Best Secrets of Great Small Businesses and the new Small Business Survival Guide: How to Survive (and Thrive) in Tough Times . He can be reached at 1-800-818-0150 or ray@propres.com .

Editor's Pick

Related Topics

Business News

Bank Accidentally Deposits $86 Million Into Woman's Account, Freezes Her Assets

The incident occurred at the Malaysian bank, Maybank.

Starting a Business

This College Student Was Tired of Working In Bars Until 4 am. So He Started a Car Detailing Side Hustle — Earning $7,000 a Month

Jack TerHaar, a University of Georgia senior, is polishing profits with Detail Dawgs, a mobile detailing service in Athens.

Marketing

Why Every Entrepreneur Should Consider Starting a Podcast

This article sheds light on the power of podcasts, particularly for entrepreneurs, outlining steps to launch a successful podcast.

Science & Technology

3 Reasons Why Web3 Will Flip Digital Ownership On Its Head

Here are the three things that Web3 could completely change about digital ownership.

Business News

She Lost Her Job as a Disinformation Scholar at Harvard — and Claims Facebook May Have Had Something to Do With It

Dr. Joan Donovan alleges Harvard stopped her research after receiving donations from the Chan Zuckerberg Initiative. Harvard denies the claim.