The Impact of Non-Compete Agreements on Women's Entrepreneurship

Entrepreneurship fuels job creation, innovation, and wealth. However, women are sharply underrepresented among startup founders, with less than 20% of venture-capital-backed companies having even one woman on the founding team.

The gender gap in entrepreneurship is persistent and problematic, and non-compete agreements widen that gap. This may seem unexpected, as neither non-compete contracts nor laws say anything about gender.

I contribute to the literature on institutions, gender, and entrepreneurship by showing that macro-level institutional policies that do not explicitly target women disproportionately affect their ability to leverage prior professional experience in founding new ventures.

Examining workers in 25 states and the District of Columbia from 1990-2014, I find that women subject to tighter non-compete policies are less likely to leave their employers and start rival businesses.

Non-competes are a blunt instrument that favors incumbents over startups, as well as men over women.

How Non-Compete Agreements Impact Women

Non-competes make entrepreneurship more costly, more risky, and more penalizing for women.

1. First, women start companies earlier in their careers than men, and have been paid less than men despite working in the same industry.
2. Second, most new ventures fail. Those that succeed tend to be founded by those with experience in the same industry. But that is exactly what non-competes block: using the skills and expertise you previously developed.
3. Third, even if someone decides to found a company, non-competes make it harder to hire talent with relevant skills.

Therefore, the risk of startup failure is higher when subject to a non-compete. Several studies in economics and psychology suggest that women tend to be more risk-averse than men.

Startups in California can draw on the full talent pool in the state, but a startup in Florida or Massachusetts must carefully consider whom they can hire without risking a lawsuit. This inability to marshal human capital reduces the chances of success.

We know from many studies that women suffer stiffer penalties for failure. This is also true for failed entrepreneurs: Women who abandon their startups and return to employment at an existing company are paid less than men whose startups do not succeed.

Two mechanisms suggest that non-competes contribute to a disproportionate “chilling effect” on entrepreneurship among women.

• First, women face higher relative costs of potential litigation due to lower earnings prior to founding.
• Second, women fact a higher wage penalty when returning to paid employment following an unsuccessful venture.

The effect is not explained by actual non-compete lawsuits, where women are markedly underrepresented.

FTC's Ban on Non-Compete Agreements

Monday’s FTC announcement to implement a nationwide, retroactive ban on the enforcement of employee noncompete agreements promises to improve wages, career prospects, and innovation.

For all of these reasons, noncompetes curb the enthusiasm of women who want to found a startup but fear a lawsuit, either against themselves or the workers they try to hire. Again, there is sure to be stern opposition to the ruling from existing companies who do not want their employees to leave and either join or start rival firms.

Implementing the FTC noncompete ban will serve to narrow the gender gap in entrepreneurship and usher in the wave of startup activity that policymakers worldwide seek.

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