What you probably don’t know about NDAs

Posted: October 22nd, 2012 | Author: | Filed under: Startups | 10 Comments »

This blog post was originally published in Xconomy, after which I promptly forgot about it and left it to languish in my drafts folder until today.

There is no love like a first time entrepreneur’s love with nondisclosure agreements.  They are a romantic dream: secret pacts bonding two economic entities together as one, if only for the transaction.  Promises of futures together and sweet nothings exchanged.  The Humbled MBA nailed it – newpreneurs love NDAs.

Now let’s talk reality.  First…

NDAs don’t stop leaks.

Theoretically, a nondisclosure agreement commits the signing parties to… well, not disclose stuff.  Practically, it gives you theoretical standing to prevail in a lawsuit where you sue someone for disclosing your secrets.

But that’s a giant stinking load of donkey dung.  It’s almost never going to happen that you actually sue someone for disclosing a secret and prevail.  It’s just too hard, too complicated, and frankly too easy to lie your way out of getting caught.  How are they going to prove they didn’t just think of the idea themselves, or hear it from a different, third party that wasn’t covered by an NDA?  Remember that if you have 99 people sign an NDA and 1 person doesn’t, that person can publish your idea in the Wall Street Journal – and to add insult to injury, when they do, the other NDAs all become invalid since they only apply to confidential information.

NDAs: terrorist threats

So forget winning lawsuits.  What about threatening lawsuits?  Well, you can threaten a lawsuit for any reason, and you can generally file lawsuits for almost any reason.  But having an NDA with someone is a very good way to make that threat more annoying.  You can file a suit that you have no  intention of consummating, and if there’s an NDA in place, they will be forced to take it more seriously – and that’s a pain in the rear.  NDAs are a force multiplier in legal blustering.  If you like legal blustering, get lots of people to sign NDAs.  It’ll make your sound and fury signify a bit more than nothing.

If you’re not the legal threatening type, there’s still some value to an NDA.  They don’t know that you’re not a crazy legal Quixote, so they might think twice before leaking.  Maybe.  But I find deceptive folk make a habit of being deceptive, and honorable folk respect these things with or without paperwork, so I don’t see a terribly great amount of benefit to it.

When NDAs get signed

There’s one and only one reason that NDAs get signed: when one side or both have a great deal of leverage in the negotiation.  You see, whichever side makes a commitment not to disclose is basically opening themselves to NDA terrorism.   Usually NDAs are exchanged before real value trades hands.  Why would someone take on that significant liability for no benefit?  Generally, because the other side has something they want.  Let me give some examples.

Company talking to a potential service provider, contractor, or employee

Someone approaches your startup and wants you to pay them money.  You think you can best evaluate their capabilities by sharing Secret Sauce with them, so ask them to sign an NDA.  They almost certainly will.  That’s because you have the money, and with money comes leverage.

Company talking to an investor

Fundraising time!  You go talk to an investor, and ask them to sign an NDA.  What’s wrong with this picture?

Well, the investor will give you a story about how they hear lots of ideas over and over again, and most ideas aren’t original, so while you might think they misappropriated your great idea they really just came across it separately.  And they might resort to platitudes, saying “VCs don’t do that” (which is true, but not a very good argument).

But the bottom line is that they have the money and you don’t.  You have no leverage to get them to sign.

Of course, there are always exceptions.  If someone of sufficient stature showed up in a VC office and said they had to sign an NDA with a first-born assignment rider in order to look at their pitch deck, they’d be fighting over the pen.  It’s all about the leverage.

Two companies talking

You can guess how this works:

  • Startup signs Microsoft’s NDA
  • Two startups dicker a bit before agreeing on a mutual NDA, or decide to save energy and skip it
  • Microsoft and Intel negotiate a master NDA for nine months, and can’t start any individual project without spending three months building out an addendum to cover the specifics of that project.

It’s all about the leverage.

NDAs: the sign-ee’s view

If someone asks me to sign an NDA, I have to assume they fall in to one of three categories.

1.       They’re a legal terrorist and see great value to getting me to sign it, so they can abuse me later with frivolous lawsuits if they think I leaked something.

2.       They have leverage, and know that they can probably get me to sign it.

3.       They’re inexperienced, and don’t realize that absent 1 or 2, it’s probably not worth asking.

#2 is pretty easy to spot, because I’m asking them for money or we’re negotiating a major business agreement.  If that’s not the case, then I figure I’m dealing with a terrorist or a novice, and either way I’m going to decline and have second thoughts about working with them.

A special note for visitors to Google and RealNetworks’ campuses

Google wants you to sign an NDA before they let you in, but they do have the courtesy to offer a “decline to sign” button.   I always click it and get a funny look from the receptionist, and then nobody else cares.  The line I have prepared (just in case) is: “If we need an NDA to have this conversation, please send it over and I’ll have counsel look at it.”

Real wants you to sign an NDA before they let you pee.  This is not a dramatic hyperbole to emphasize their vigor in pursuing your signature; it’s the literal truth.  Go in to the front desk of their Seattle office and just try to get to the bathroom without signing an NDA.  I pulled it off, but it required three security staff, one of whom had to escort me to the men’s room.   Fortunately for all involved they opted to stay outside.

In summary, then:

1.       If someone is asking you for money, make them sign an NDA.  It will make them slightly more scared of leaking information.

2.       If you are asking someone for money, don’t ask them to sign an NDA.  You will come off looking like an ignoramus or a terrorist.

3.       If you’re doing real business with a company, you will probably sign an NDA.  If one company’s bigger, you’ll use theirs.

Happy non-disclosing!

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  • The only thing I would add is if the investor wants access to customer or revenue information. I believe it is fair to provide an agreement that protects this sort of information so as not to share it with competitors or affiliate companies.

  • I haven’t seen it, but for a later-stage company in a hot deal, I can imagine there might be enough leverage to negotiate for that successfully.

  • This is a great article. Is it possible to reuse this in a Norwegian magazine for startups? Obviously we would give full credit!

  • As usual Dan, you put things so clearly. I get questions about this from friends who have ‘great ideas’ but can’t understand why many people won’t sign NDA’s and other don’t take them seriously when they ask. It’s important to understand why someone would want one, why someone wouldn’t want one, and why they are fairly pointless in general. Thanks!

  • Thanks for the kind words. Go ahead.

  • Yes, part of this was so that I could gently point people to a resource when they asked me about this, which happens somewhat often.

  • Thanks, much appreciated.

    Maybe we should talk more about editorial cooperation. I can’t seem to find your email address…

  • Jual Mandi Bola

    terima kasih untuk informasi yang telah
    anda berikan sangat bermanfaat sekali bagi kami selaku pembaca dan
    sukses selalu.

  • sepatu kulit

    terima kasih atas informasinya dan sukses selalu :D

  • Una King

    This is why you need a great patent attorney. Screw an NDA, what a joke when you think about loose lips sinking ships and dreams. Of course a patent search and filing cost real cash, but calculate your loss, and if you really believe you have a hot revenue maker, it’s chump change next to loosing millions. Protect yourself and pony up to protect your intellectual property–that’s why it’s called that. A gold mind is a terrible thing to waste.