Cost of a noncompete

How do y'all go about evaluating the cost of a noncompete? Do people with longer non-competes get screwed out of bonuses, or have their careers hindered? 

For background, I've recently got a couple offers with non-competes of varying length (they differ by about a year, for quant), and was just curious on how to compare them.

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Comments (8)

  • Investment Manager in HF - Other
Sep 4, 2021 - 8:15am

What do you mean screwed out of bonuses?

Noncompetes are meant to restrict you from going and working for a competitor (and taking with you what you've learned at your current firm). That will make moving to a competitor harder, although some top firms are willing to wait until the non compete period is over. 

It is also much harder to enforce a non compete if you are laid off. 

Sep 4, 2021 - 2:52pm

By screwed out of bonuses, I mean generally being underpayed on non-salary comp in the future and being in a tough position in choosing to sit-out for a while or continue being underpayed. In a sense longer non-competes have an additional risk if things don't work out well, and will reduce your negotiating power. 

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  • Investment Manager in HF - Other
Sep 4, 2021 - 3:07pm

While that is definitely possible, there are a few things that would normally prevent that:

1) reputation - this information would quickly make its way around and people would be very hesitant to work there. Tougher to know about if this is a small shop though

2) retaining talent and fighting the non compete - it isn't fun to fight a non compete (for employee or employer). If you are screwing people on bonus, it becomes even harder to enforce (I.e. firm X is offering me double, but current firm both won't pay me and is trying to enforce the non compete). You would see many cases of this if getting screwed on the bonus was the norm 

3) it is just bad business - there are definitely bad firms out there that don't care, but if you are trying to beat markets and grow your firm you want employees who want to be there. You can't succeed as a business without talent (this is very related to point 2 above) so the 10,20,50k they screw you out of costs the firm a lot more in talent retention. 
 

Again, there are bad firms out there who are just looking to use you and pay you the least amount possible. I wouldn't hold the noncompete period as the biggest warning sign. Almost all top places have them (of varying terms and time horizons) and most are not screwing people over on bonuses (first years making 200-400k..)

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  • PM in HF - Other
Sep 8, 2021 - 5:47pm

All the posts above very well explained the employer side of the equation. The actual calculus though I suggest you do is over 2 years in your career and again usually not relevant but the scenario would work like this.

-You are a very strong performer at the firm and a jr to mid-level analyst. Your bonus is %salary or to make math easier let's say 1-3% of the book.

-A new firm or someone you know gets your name to somewhere to move to a more senoir analyst or possibly jr-pm role. This new role will be 5% of book.

So better opportunity more upside etc...But if your non-compete is 12 months you would need a hefty sign-on plus if you leave early for them to match that current bonus. So that is the one situation where the "non-compete" calculus comes in do you take a paycut or are you just too expensive for the other firm. 

That said as mentioned this is a rare situation and even in those scenarios you are getting a "garden leave" of atleast salary etc to sit around and wait, so almost a vacation.

Sep 9, 2021 - 1:23am

Can't comment on the cost as the above have done a far better job than I would and haven't been in that seat myself. That being said, my friends who had to sit through non-competes were all at name-brand MMs (Citadel / P72 / Milco etc) for about 6mo-12mo but were paid at full base. Obviously that is low given the majority of your comp is from bonus but for those who didn't receive their bonuses that cycle and were sitting it out thru gardening, they just adjusted their lifestyle and enjoyed the fuck out of having nothing to do and went and lived in random spots such as Bali or Hawaii or whatever other miscellaneous island presented itself in their heads. Point being they just enjoyed the time off and even the ones I was really close with didn't really meddle with the true cost of the non-compete given we were so early in our careers it was just okay if we missed one bonus cycle if it meant getting a better seat and better prospects in the long run. 

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Sep 9, 2021 - 8:43am

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