Startup Reality Distortion #3: The Fallacy Of the Non-Disclosure Agreement (NDA)

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Startup Reality Distortion #3: The Fallacy Of the Non-Disclosure Agreement (NDA)

 

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:

 

  1. Information about what you are trying to do (i.e. the idea, market opportunity, etc.)
  2. 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:

 

  1. 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.
  2. 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.
  3. 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.

Posted by on Tue, Apr 18, 2006

COMMENTS

I was about to add another point here, then it bacame too long so I made it a post on my own blog:
http://www.zoliblog.com/blog/_archives/2006/4/19/1896427.html

posted on Wednesday, April 19, 2006 at 11:54 AM by Zoli Erdos


Your reasoning is reasonable but I disagree.

You're right: it may not be relevant, it may not protect you and somebody may not sign it. But, I think that those situations can be handled on a case-by-case basis. No need to categorically throw out the NDA.

posted on Tuesday, April 25, 2006 at 12:29 PM by Daniel Howard


Daniel, let's not forget the basic premise: you as an Entrepreneur will not get it anyway, VC's categorically refuse to sign an NDA, so it's not really an existing choice. I think the points raised in the post are about why you don't really lose anything anyway, but again, it's not your choice...

posted on Tuesday, April 25, 2006 at 12:52 PM by Zoli Erdos


I guess that I don't accept the premise. So, I don't accept the arguments to the level of certainty that is claimed.

The article has some good points. It's worth reading.

posted on Tuesday, April 25, 2006 at 9:58 PM by Daniel Howard


Well, you certainly don't have to accept the premise - just like you don't have to accept venture funding, either :-)

Seriously, if you really wonder, here's a good source of VC bloggers: http://www.ventureblogs.com/. Visiit some of the VC blogs and leave a comment, asking if they are willing to sign NDA's for Entrepreneurs who approach them. (note: we're talking about the initial contact stage, not further down the road when a deal is likely..)

posted on Tuesday, April 25, 2006 at 10:11 PM by Zoli Erdos


I understand where you are coming from. But I've found all sorts of people who are willing to sign NDAs. I think that a blanket statement about NDAs should be replaced with a qualified statement.

I think that this is where a lot of technical people get off track. There's a difference between an absolute certainty and a strong likelihood. In his book, "High Stakes, No Prisoners", Charles Ferguson got VCs to sign NDAs. Sure, some said to him, "No way." Today, not then, probably a lot more will say, "No." Maybe even all will say, "No." But to state that as a certainty, you need more than anecdotal evidence.

I'm not trying to push you into a corner. Yeah ... I agree, generally. And, I'm sure that if you put enough qualifiers on it by saying, "Well, I didn't mean nobody; I meant VCs. And, I only meant the initial contact stage. And under X circumstances with Y people with Z exception."

Yes, I agree: if you put enough qualifiers on it, the statement is true.

posted on Tuesday, April 25, 2006 at 10:44 PM by Daniel Howard


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