What You Probably Don’t Know About Non Disclosure Agreements
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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.
[Editor's Note: This editorial was first posted at Dan Shapiro's entrepreneur blog.]