In my role as angel investor and informal startup advisor,
the issue of NDAs (non-disclosure agreements) comes up about once or twice a
month.
It is likely that a lot has been written regarding NDAs from
an investor’s/VC’s perspective. There are very good reasons
on why they won’t usually sign them. But, I’m not going to
talk about that here.
I will look at NDAs from an entrepreneur’s perspective
and make the argument that pursuing an NDA may not be a particularly effective
strategy anyways. Note: This is not legal advice (I’m not a
lawyer), but just one guy’s opinion on how NDAs (or the pursuit of them)
may distort your reality.
The Fallacy Of The NDA
The common rationale for trying to get people to sign an NDA
in the first place is that you don’t want them to reveal your “secrets”
to others. So, the thinking goes, “if I get them to sign the NDA,
then I can reveal some of my secrets because the NDA will protect me”.
Lets say we divide the type of information you might
conceivably disclose to an outside party into two categories:
- Information about what you are
trying to do (i.e. the idea, market opportunity, etc.)
- Information about how you are
going to do it
My first argument will be that items that fall into category
1 (what you are trying to do) should not be kept secret anyways. You have
more to gain by disclosing this information than trying to protect it (in most
cases). One of the biggest problems startups face is that they invest
time/energy/money into an idea under the false premise that they will be the
first/only company in that market within a given window of time. In most
cases, this is simply not true. By talking to people (that you trust at
some level) and discussing your idea, you’ll get a better sense of who is
out there doing similar things. Some of these could be competitors –
but some could also be partners, customers, acquirers, etc. As a startup
entrepreneur, I prefer to really get a sense of what’s going on in the
market I’m looking to enter before getting too deep into it. If I
try to keep the idea a secret, I’m likely not to discover this
information until it’s too late. I would further argue that a
founder’s basic fear – that revealing the idea will cause a bunch
of people to hear about it, recognize its brilliance and then pursue the idea
themselves, is very rare. [Note to self: This is a topic worth
exploring on its own].
So, I would argue that its to your benefit to share
information about what you are thinking about doing as soon as possible. This
surfaces potential issues, existing competitors and gives you a clearer lens on
reality. By talking judiciously about your business with advisors,
investors, potential employees and others, you can avoid this reality
distortion effect.
Second, with information that falls into category #2 (that
is, how you’re going to do it), I would argue that the truly
special/secret stuff you don’t want to reveal anyways (with or without an
NDA) unless you’re so far along in a conversation with a potential investor/advisor
that it becomes necessary and makes sense. The fallacy of the NDA in this
situation is that it actually has any value. In most cases, it doesn’t.
As a startup, your ability to actually enforce
the NDA is minimal. What’s left is the vague notion that by signing
an NDA, the person/firm you reveal your information to is less likely to
cavalierly share it with others. This is an interesting notion, and I can’t
refute it.
Finally, lets take a look at the cost of actually asking people to sign an NDA. Given
that most sophisticated people (investors, partners, etc.) that you will talk
to have a policy not to sign NDAs in early stages of a discussion anyways, the
simple act of actually asking for an NDA often signals to the other party that
you’re new to the game. If you had a fair amount of experience,
they reason, you would know not to ask, as it’s just not going to happen.
So, to summarize my points:
- Its often in your interests to
share the “what” (but not details of the how) as early in the
process as possible. In this case, an NDA is not relevant.
- Don’t rely on an NDA to
protect the truly “secret” stuff. It’s likely not
going to give you the protection you think it is.
- Your odds of actually getting
someone to sign the NDA are low anyway, so it’s likely not worth the
effort.
This is a reality distortion that is relatively easy to
avoid. Just don’t it. Existing behaviors are well established
and you’re not likely to change them.