Do trade secrets and non-competition agreements affect venture capital investments?

This study investigates the impacts of stricter enforcement of non-competition agreements and stronger trade secrets protection on Venture Capital investments. I argue that non-competition agreements, by reducing outbound mobility and knowledge leakages to competitors, harm entrepreneurship. By contrast, trade secrets do not impede previous employee to found their own companies, assuming they are not misappropriating any trade secrets. As a result, trade secrets are not an impediment to knowledge spillovers and thus foster entrepreneurship. Moreover, non-competition agreements protect the human capital of the employees by preventing them to move to a competitor, whereas trade secrets protect some knowledge complementary to employee human capital, this indicates that these two legal means of protection might be complementary. This study uses data about Venture Capital investments in the U.S. from 1980 to 1994 and considers longitudinal variation in the enforcement of noncompetition agreements and trade secrets. The results indicate that stricter enforcement of non-competition agreements reduces Venture Capital investments and that stronger trade secrets protection increases Venture Capital investments. Finally, these results also indicate that the stricter the enforcement of non-competition agreements, the higher the positive impact of trade secrets on Venture Capital investments