Here is a scenario that will be familiar to anyone in the startup space:
An email comes in from a prospect with the header “software project.” The body of the email reads:
“I am evaluating a game changing enterprise commercial real estate app to streamline tenant onboarding for office properties serving small tenants and I need some help on a key aspect of the development. Randy said you guys helped him out a bit and I thought I would reach out. Is this something you can help with?”
Your team sets up a meeting to discover the need and present some options for solution. Once scheduled, you get the expected “NDA” subject header email in your inbox:
“Now that we are scheduled to meet, it seems best to get an NDA executed so we can be open about the idea.”
Great… you review and execute the NDA and at the meeting the idea is: “a game changing enterprise commercial real estate app to streamline tenant onboarding for office properties serving small tenants”… the same thing that was stated earlier.
Anyone with more than a day in the small business or tech world is familiar with NDAs. They are the first thing slung around by someone with an idea. And most of the time, they protect nothing.
Overview of the NDA
NDAs were designed to create a fair playground for the free exchange of ideas without the fear of exposing critical secrets. They have a purpose. For instance, they are very useful when two competitors or firms serving similar customer groups want to evaluate a partnership. They can also come in handy when a firm is looking for a strategic partner and there are true trade secrets or competitively sensitive information that must be shared to evaluate a partnership. In all cases, they are intended to provide an easy-to-execute safe space.
Here are a few rules of thumb to discover whether you need an NDA:
1. Are you sharing the same information elsewhere?
If you are filling out applications for venture pitches or posting business plans in Slideshare for public broadcast and ease of access for funding purposes, your NDA covering that information is worthless. By posting publicly, you are actively publicizing what you say elsewhere is ‘confidential information’.
Most of the venture competitions and the vast majority of institutional funders will not execute NDAs. You will have to take their word that they aren’t interested in changing their day job for your idea. All ideas take hustle and if the fear that someone can easily execute your idea is paralyzing you, then either you don’t have an idea or you are naïve about the difficulties of the road ahead.
2. Is the ‘ask’ of an NDA worth the protection?
Asking someone (even a potential vendor) to sign something has a price. People on the other side of that request are likely viewing you with similar suspicion. They will form opinions about you by the way you request an NDA and by the content of your NDA. They will be viewing your NDA for evidence of litigiousness, potential for partnership, reciprocity, and other markers that would come in handy in assessing a potential business relationship.
This principle is especially true for partners and investors. In such cases, the meeting itself is a huge ask and once scheduled, you don’t want to do anything to threaten it. Requesting that an investor who is short on time and high on ambivalence sign your NDA might provide the perfect exit opportunity for them: “I’m sorry, I don’t sign NDAs as a rule of thumb. Best of luck.”
Think through the specific benefits of the NDA. Is it a client list, a technological innovation, a set of lessons learned? Having a specific thing you are protecting helps you define what you can share openly. You might find that it is easier to withhold that specific information than request an NDA. This builds trust and might be all you need to get a contractual relationship started. And in almost all cases, such contracts with vendors include standard non-disclosure terms.
3. Are you being fair?
Proposing a unilateral and harsh NDA on someone is a surefire way to get a dial tone on a conversation. In fact, even worse is that it could weed out the good actors who are diligent in reading agreements. Counterparties who sign would be: i) those who are confident that your one-sided terms wont impact them, ii) those who are ignorant that any such terms exist, or iii) those who don’t care… Counterparties who care, know the risks, and know they are one-sided are likely to push back or, worse still, quietly withdraw.
There is almost no scenario where a unilateral NDA makes sense outside of an employment agreement. You could argue that investors might fit into the need for a unilateral NDA, but that again raises the issue of the ‘cost’ of the NDA; do you want to exclude an investor? Maybe so. It’s worth a thought.
In most cases, you are sharing an idea to see if someone can help you. That help is almost always their ‘confidential information’ or it leverages it in some way. Using a mutual NDA, in the limited circumstances where it is useful, conveys that you respect their confidentiality as well. This opens a free exchange potential. Of course, most people you are considering sending your NDA to are okay to meet without an NDA covering their information. Hence, it might not be needed (back to point 2: what is the specific thing you are concerned about?).
4. What is the purpose?
An NDA can be used purely to establish ‘tone’ in a relationship and to signal that the information is important to you and you would appreciate the recipient respecting that. However, when push comes to shove, are you ready to defend your NDA?
If the purpose of your NDA is to establish the level of care that you expect from the potential partner, then the contents of it should be reciprocal and easy to accept.
Another purpose that comes up often is if you will be sharing information that you are under NDA with a third party. In such circumstances, the minimum NDA acceptable to your third party should be used and this purpose made clear with the recipient. It helps format the context to ensure the appropriate tone of care is established as well as indicating that your purpose for the NDA is driven by your care of a third party’s confidential information.
5. It is not a non-compete agreement.
A lot of people mistakenly assume that if a counterpart signs a NDA, they cannot then become a competitor. In one example, someone, let’s call him Bob, explored an acquisition of a business with a potential capital source, let’s call them Capital, under NDA. The meetings went well until Bob heard that Capital had contacted the target with the intention of acquiring the business without Bob. Understandably, Bob was furious; they had signed an NDA after all! What Bob didn’t realize is that Capital could easily establish knowing about the target and knowing that the target was potentially open to an acquisition without Bob; hence it was public information. While Bob might have a case, it would be a grey area at best. Bob used the NDA as a catch all protection device and not for its intended purpose.
Why Investors Don’t Sign Them
A lot of investors have shared why they do not sign NDAs. The most compelling reason is that reviewing and executing an NDA provides too much friction. Most firms review dozens of pitches per week. This velocity is not possible if an NDA negotiation is required. In addition, investors are generally risk averse and especially averse to legal risk. They cannot take the chance that a frustrated entrepreneur will sue them because they backed a different but similar deal.
Here is some great advice on the topic:
- Anil Dash: “One More Time: No NDAs“
- Chris Ronzio: “Why I Wont Sign Your NDA“
- Brad Feld: “Why Most VCs Dont Sign NDAs“
The Bottom Line
The bottom line with NDAs is that they say something about you and they are for specific purposes. They are far from useless, but often are most valuable to the recipient to learn information about you and your character. Use an NDA to establish a tone, protect truly critical IP (not ‘ideas’) and to protect the rights of third parties. And in all cases, use a lawyer to create the right document for the right situation.