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June 05, 2005

MYTH: NDAs are a Good Idea

REALITY: Nothing Screams “I’m Clue-less” Louder than asking for an NDA.

Read my lips: “NDAs are a) unenforceable and b) even suggesting an NDA makes you look like a complete idiot.”

BTW, For those of you who don’t know:

NDA = Non-Disclosure Agreement

(Although NDA should mean: “No Deal Alert”, “Nothing Disclosible Again”, “New Dopey Attorney”, “Nothing Dumber Allowed”, “Never Done Appropriately”, “Naive Dumb Attorney”, “Naive Disclosure Agreement”, “No Deal Agreement”, “No Dung Allowed”, ...)

The request to sign an NDA is yet another red flag that VCs see all the time.  So let’s set the scene: VC enters the conference room where the entrepreneur is about to present —

Clue-less Entrepreneur: “Would you mind signing an NDA first?”

VC: “No problem.” (VC thinks: “Oh man … not another one!”)

(Use of the word “one” refers equally to the NDA and the entrepreneur)

What is the entrepreneur really saying when requesting that executed NDA?

a) “You might be a crook.”

b) “What I am about to reveal to you is so earth-shattering that it is a distinct possibility that you will drop everything in your life and try to steal my idea and do it without me.”

c) “If I force you to sign an NDA, you will think I am being a responsible businessman.”

d) “My ideas will seem much more important if you have to sign an NDA first.”

e) “I need to guarantee you will never ever reveal to the world how truly stupid my ideas are.”

From my experience, only answer “e” makes sense to me.  Over the years, I’ve signed hundreds, if not thousands, of NDAs.  And, so far, I have yet to learn anything from the subsequent disclosure which —

  • I didn’t know already,
  • I hadn’t seen at least ten times before,
  • Wasn’t easily discovered in the public record,
  • Wasn’t generally known by industry participants, or
  • Wasn’t so stupid, mundane, or derivative that I couldn’t imagine why anyone would ever consider wasting any time on it.

So it’s always be hard for me to take anyone seriously if they request an NDA.  From my own past, I can dredge up two relevant stories:

Story #1

In the mid-1980’s, I was working late one night with a patent attorney.  Being a curious, but naive, engineering graduate student, I asked the patent attorney if people ever had to worry about their patent attorney stealing their ideas:

Attorney: “Hmmmm … Only in the unlikely scenario that the attorney could be guaranteed at least $5 million in cash.”

Me: “Huh?”

Attorney: “Well, I figure $5 million is the life time earnings of a typical patent attorney.”

Me: “Huh?”

Attorney: “Well, if a patent attorney was ever caught stealing a client’s ideas, he would never be able to work again — so really, the temptation to steal an idea would only be if — a) it was a guaranteed pay-out, and b) the pay-out exceeded his subsequent lifetime earnings.” 

Me: “Gee, that makes sense.”

(In retrospect, what I should have said was: “Gee, it’s comforting to know I’m working with a patent attorney who has thought through so precisely under what circumstances it would be appropriate to consider stealing a client’s ideas.” ) [insert lawyer joke here]

Of course, being a chronically naive idiot, I didn’t really appreciate what he had just told me … which bring me to —

Story #2

It’s the early 1990s and I’m visiting the first VC on the road show for my first venture-backed company —

Me: “Gee, would you mind signing an NDA first?”

(I remember being so proud at the time that I even knew what an “NDA” was.  One of those “insider acronyms” that would surely prove I was part of “the club.”) 

The Kind and Patient VC: “Sure … no problem.”

(He signed it without hesitation and handed it back to me.)

Me: “Gee, thanks.”

The Kind and Patient VC: “By the way, do you mind me letting you in on a little secret?”

Me: “Wow! … sure thing!”

The Kind and Patient VC: “It’s something you should probably think about from time to time.  Building companies is really all about execution – not ideas …you know — the old 5% inspiration, 95% perspiration rule …Anyway, no matter how great your ideas are and now matter how great your plan is, it’s unlikely anyone will ever understand those ideas and plans better than you …”

Me: “Uh? … Yeah?”

The Kind and Patient VC: “… and people like me, who make a living working with people like you, would always chose to work with you first …”

Me: “Uh? … Yeah …OK …”

The Kind and Patient VC: “ … and the truth is — most people never act on ideas or plans anyway — you know: never really commit to the whole perspiration part …”

Me: “Uh? …Huh?”

The Kind and Patient VC: “Let me explain it this way — Even if you were to go down to the corner of Broad and Wall Street — ground zero for the financial markets — and randomly pass out 1000 copies of your business plan, no one will ever execute that plan without you — no matter how great it is.”

Me: “Uh? …Oh … soooo, you’re saying I’m an idiot for asking you to sign that NDA.”

The Kind and Patient VC: “No … just reminds me you’re a little green.”

Okay.  I’m a little slow, but I finally got it —

Key Principle: CONTEXT = TRUST

— not an NDA!

Am I saying an NDA is NEVER called for? 

Pretty much … It’s a little like asking an Eskimo to agree in writing to never use a refrigerator … It would be a very very rare circumstance indeed that called for an NDA to be executed —

e.g., in a highly-scrutinised high-profile high-stakes negotiation between two highly adversarial and highly litigious parties each armed with high-price attorneys ready to attack on command.

So the next time you catch yourself asking: “Should I get an NDA?” Remember: The answer is “e”.

Posted by cmayaud at 08:46 PM | Permalink| Comments (5)
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Comments

Me personally I used the old trick of telling the older guy with the business plan and his letter of confidentiality to mail himself by registered mail a copy of his idea and all relevant material and not to break the seal. In a court of law this will always establish time frame by the post mark and validate the proposal for the brilliant older guy looking to launch his baby. I use the term older because I was the youngest Investment Banker on my street and all the guys with the deals were, well older; reminds me of an article I thought to mail you Chris. It was about ceativity and age; the argument was that as you age you become less creative. Needless to say since I'm 50 I fired off a letter or post so quickly to the reporter that I don't think I'll be hearing that take anymore. Creativity not about age. It's unique to the individual and it's not a colective thing. The deal here is that experience augments one's creative powers regardless of age if we were comparing two healthy individuals; one old and one young.

Posted by: Michael Pokocky at June 6, 2005 04:22 AM

Excellent post. Very pragmatic, high entropy, information content. Well written too. Your's is one of the few blogs out there where visitors, at least this one, are grateful for that you take the time and effort to share your thoughts.

Posted by: rsd at June 9, 2005 12:25 PM

Posted by: rsd at June 14, 2005 03:09 AM

I wish I had a nickel for every time I had to make this point to a young guy with an idea.

However, some things have changed in the "new normal" economy.

1. VC's have several "entrepreneurs in residence."

2. VC's have more money than good ideas to put the money into.

3. They get pitched all the time.

I've seen VC's take the concepts heard from several pitches, take the best of those concepts and combine them into a business that they fund themselves run by an "entrepreneur in residence" or someone who has run one of their companies previously that had a track record of execution.

Unfortunately you can't protect ideas. So my advice is to be careful about who you share them with. Which flies in the face of Guy Kawasaki's "Eat Like a Bird, Shit Like an Elephant" theorem.

I guess there is no right answer, just use your best judgement.

-Bryan

P.S. I really enjoy this blog.

Posted by: Bryan Menell at June 20, 2005 10:59 AM

I think you're exaggerating the "idea alone is worthless" thought; I've seen several instances of VCs running off with ideas, in the mold Bryan describes. However, it is entirely true that NDA doesn't protect you from this. Generally speaking, completely agree, NDAs and VC pitches do not mix.

Posted by: Parand Tony Darugar at June 20, 2005 10:14 PM

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