What You Probably Don’t Know About Non Disclosure Agreements

2/15/11Follow @danshapiro

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.

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!

[Editor's Note: This editorial was first posted at Dan Shapiro's entrepreneur blog.]

Dan Shapiro is the CEO of Robot Turtles, a crowdfunded boardgame that teaches children programming. He previously worked at Google after it acquired his company, Sparkbuy. Follow @danshapiro

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  • http://www.MountainLogic.com Scott Elliott

    The one time you need to consider an NDA is with patents. You if have something you plan to patent and you show it publicly your one year clock in the US start running. Foreign patent rules are different. It is very cheep and easy to file a preliminary patent disclosure and you should do it before disclosing any secret sauce that may be patentable.

  • http://www.ovp.com Gerry Langeler

    Adding to Sean’s thoughts – protecting IP is the one area where VCs will sign a NDA (or more accurately get someone else to). If we see a deal that has very powerful technology, that has not yet been disclosed, the last thing we want to do is start that 1 year clock. But we also don’t want to open ourselves up to “NDA terrorism.” So, we’ll find a technical/scientific expert we trust, and ask them to sign the NDA and look at the material. Our request is they tell us at the end not how it works, but is it likely to work. If so, then we can proceed…

  • Sophia Katt

    When the discussion won’t be fruitful without reviewing/disclosing company finances or statistics, an NDA can be protective for both parties. But not without counsel review.

    When having a general business discussion, being somewhat familiar with what constitutes proprietary financial info, and stating at certain points that the discussion is moving into NDA territory, can often be helpful for both parties as well.

  • http://boswellip.com/ Mason Boswell

    This is why filing a quick provisional patent is far superior to an NDA before going into a meeting. The provisional patent provides an evidentiary record of who had what before the meeting, and puts a provable date on your invention. Provisionals can be filed for 1/10th of the cost of a full patent and thus are about the cost of a good custom-drafted NDA. Also, a provisional doesn’t require that you get into a lawsuit immediately to leverage it. If the other person copies you and succeeds with your invention, you can demand royalties from them down the road after you get a patent and have more money.

  • Sophia Katt

    I agree with Mason’s comment about provisionals in situations like the fact pattern he’s outlined re patents. My comment is more oriented towards the kinds of meetings that cover actual $ in statements, cash flows, op stats like head count or production, etc.–not patentable processes, but info that is by its general business nature sensitive but not, itself, a product. It doesn’t take much info for people who are well-versed in financial statement construction to figure out a lot more about your company than you might realize during a meeting.

  • http://www.sparkbuy.com Dan Shapiro

    Scott, Gerry, Mason, I agree with your points completely – provisional patents are great, and if you’re credible enough to warrant the expense and effort, you might be able to convince a VC to recruit an expert to look at your expert under NDA.

    Sophia, I too often use financials as a trigger for when a mutual NDA is appropriate.

  • http://www.palatuccisearch.com Chris Palatucci

    Dan- Thanks for this article. I couldn’t agree with you more, and for years have been saying “when was the last time you heard anyone getting sued over an NDA?” Having prepared and signed more than I can count, early on I recognized that they don’t really make much sense.
    To the point about patents, I’m pretty sure the law regarding disclosure refers to _public_ disclosure, not telling an individual. The clock starts running if you make an enabling presentation, publication of an abstract or the like.

  • http://www.xconomy.com/author/wroush/ Wade Roush

    Dan, great post. You would be surprised (or maybe you wouldn’t, as it sounds like you’ve seen it all) how many technology companies actually ask *journalists* to sign NDAs. I’ve never understood that, as the whole point of interviewing someone is to find out stuff that you’re going to tell the world. I have never and will never sign such an NDA.

    Usually it’s not a problem – like you, I just click “decline” every time I visit a place like Google, and no one cares. But in one recent case, a Silicon Valley company which shall remain nameless wouldn’t let me past the front desk unless I signed their electronic NDA. I refused and wound up interviewing the CEO in the lobby!

  • http://startuppoker20.com Bob Crimmins

    Really great piece, Dan. I now have a resource to refer shocked entrepreneurs to after I decline the offer to have me sign their NDA in exchange for the privilege of helping them with their fledgling startup.

  • http://venturecounsellaw.com Chris Evans

    I’m sadly all too familiar with Google’s “sign-at-the door” NDA process – “legal terrorist” is an apt term for it. Want to see a Google exec for a potential deal – guess what, you can’t tell anyone you met. Its like it never happened.

  • Sophia Katt

    Bob’s post is one I both agree and disagree with. Once I am getting paid to advise, I generally insist on an NDA for my own disclosure protection. But if I am interpreting Bob’s comment correctly he is absolutely right that a lot of tech startups have the notion that they “deserve” free advice in the form of endless meetings with the vague promise of stock options sometime in the distant future. And FYI, children, you don’t!

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  • Doug Crice

    NDA’s remind people not to talk about stuff, that’s their main practical value.

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