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An NDA or no NDA? That is the question

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Shakespeare loved a good old NDA
Shakespeare loved a good old NDA

In the late 1500s The Bard was a huge fan of Non Disclosure Agreements (NDAs) and was always found with several on his personage eagerly awaiting a signature. Following a series of costly plot leaks after discussions with Henslowe, and healthy competition from Marlowe who was always keen to acquire new ideas from loose lips, Shakespeare made full use of English Common Law to protect his mental incarnations while vocally procuring interest.

Of course I jest, there is no evidence that Shakespeare made use of NDAs, but still, it raises an interesting question. Is an NDA a useful tool to enable the entrepreneur to share their ideas and plans without fear of plagiarism? In short – probably not!

Is an NDA a useful tool to enable the entrepreneur to share their ideas and plans without fear of plagiarism? In short – probably not!

When trying to evaluate the usefulness of an NDA, it helps to view the situation from both perspectives, that of the entrepreneur seeking protection, and from the position of everyone else (possibly a mentor or potential investor).

Mentor/Investor Perspective

Apple Geeks
Should say “making ideas while sitting”

I can talk about this from my own personal perspective. If an entrepreneur has approached me wishing for some business advice but would like me to sign an NDA before discussing anything, I am likely to refuse. There are a number of issues in play here:

  • No quid pro quo – You are more than likely going to receive some useful business advice from me in very quick time for no charge, before we arrive at some sort of more formal arrangement. While I have every intention of keeping our discussions confidential, I have no wish to be bound by a legal agreement in order to help your business for free. There is no upside for me.
  • Prevents me from doing my job – I am a man of my word, and any agreement I sign I intend to abide by. Over the last five years, I have advised in excess of 200 startups and there is a small handful of similar themes that come up time and time again – a new way of recruiting; a new kind of social network; dating with a difference, etc, etc. Many of these ideas are remarkably similar, so much so that they could be described as essentially the same. If I sign an NDA with you so that you can discuss your “facebook v2” idea, it is highly likely that when I’m discussing business with the next person with their own “facebook v2” idea, I’d be constantly breaching the terms of the NDA I had signed with you, despite being discrete and maintaining your confidentiality. I would essentially be barred from legally doing what I do, having signed your NDA so that I was able to give you some free advice. Why would I do that to myself?
  • Prevents investors from targetting sectors – Investors face a similar problem, being at risk of breaching any such NDA. A group of investors may have convinced themselves that they need to be heavily invested in the next “facebook v2” idea. However, they may not be certain who to back, and they are well aware that most startups will fail. For this reason they may deliberately choose to invest in multiple startups that are all doing the same sort of thing – they are deemed to be in competition with each other. The investors are certain it is a sector they want a stake in, but cannot be certain who is most likely to succeed, and consequently back multiple startups with similar propositions.
  • You look naive – We generally don’t expect to be asked to sign an NDA unless you obviously have something that warrants some protection, such as paying customers, a secret sauce or some valuable research. Asking for an NDA can make you look inexperienced and so should be reserved for when there is something of actual value that may need additional protection. If you’re merely seeking feedback and advice on an undeveloped idea an NDA is largely pointless and ineffective.
  • The Golden Rule – The one with all the gold makes the rules. You don’t get what you want by telling them what to do.

Entrepreneur Perspective

Shhh, entrepreneur talking!
Shhh, entrepreneur talking!

There are a number of issues from the Entrepreneur or Startup perspective in seeking an NDA.

  • It does not protect you – An NDA does not protect you from having someone else pursue your ideas or seek to benefit personally from your confidential information. It does offer you a legal mechanism of seeking recompense should this happen, and it may dissuade an inexperienced or dishonest person from seeking to gain advantage from what you have shared with them.
  • What are you protecting? – An NDA is a very ‘broad brush’ document and seeks to protect everything. Bearing in mind you are likely to be an early stage startup, it is worth considering what value you are trying to protect. Take into account that if you are working with nothing more than an idea and some abstract concept then it will be deemed to have little or no value, even if you believe that massive potential exists. You may have spent a small fortune on registering trademarks, having a brand designed, legals drafted, and who knows what manner of things, but this doesn’t necessarily translate into anything of any value.
  • Litigation is expensive –  Very expensive! If you genuinely believe that your NDA has been breached to your detriment then you may have cause for legal action, but in order to pursue it you’ll need very deep pockets. Before even considering whether you can afford to risk a five or six figure sum in taking this through the courts, it is worth considering the following:
    • Don’t sue poor people or poor companies – You want recompense for your losses, and recovery of your legal expenses. Victory is short lived if you find that you are unable to recover any money from the losing side. If the losing side is a cash poor startup, there is unlikely to be any sensible reason in suing them beyond a vanity exercise.
    • What have you lost? – If the court finds in your favour, it will look to remedy the situation. Your claim will need to reflect your losses cause by their breach of the NDA and you’ll need to prove these losses. Let’s say that you have proven the defendant used your idea to start a business and over a 12 month period generated a cool $1m in profits. You may believe you have a claim on this amount – the defendant has conveniently shown what your losses amount to. However, there is a whole lot of work needed in taking an idea and turning it into a $1m business, and can you confidently show, on the balance of probabilities that you would have achieved this? In this instance it would be almost impossible to prove that you have suffered any significant loss, regardless of the defendant’s gains. After all, what prevented you from doing this as well?
    • What can you prove? – You may be convinced that the defendant has ripped you off, but unless you have some hard evidence you are not going to win. Court cases are decided on what you can prove, not on what you think you know.
  • Being overly protective – It is easy to think you have the world’s best idea, but you almost certainly haven’t. The best way to gauge whether your idea has any legs is to discuss it with as many people as possible. Only by seeking feedback from different sources, including prospective customers will you ‘get a feel’ for whether you are onto something. Unfortunately, when we feel we have something of value we tend to do the opposite and become very protective of it, to our own detriment. Seeking an NDA might be an indication to yourself that you are being overly protective.
  • False expectations – You want an NDA signed because you fear the other party may exploit what you share with them. Mentors and Investors are looking to help and get involved, they are not looking to see if they can steal what you have. That said, I have had the misfortune to meet and work with people who turned out to be less than honest in their intentions. The best way of protecting yourself from these sorts of shady individuals is to avoid them altogether as you’ll find an NDA to be ineffective against people who lack morals and integrity.

This is only a short list of the drawbacks of an NDA, and it’s certainly not meant to be an exhaustive list. Let me know if this has been helpful, and share your experiences below.

Images provided under a creative commons licence by storebukkebruseJoakim Jardenberg and Maryland GovPics.

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2 thoughts on “An NDA or no NDA? That is the question”

  1. It’s refreshing to hear somebody publicly say that NDA’s are close to worthless.
    For years, my company has been in the business of doing engineering design for hire, often to other companies who need to outsource niche work and often to startups in need of expensive resources they’d rather rent than own.
    The established companies who are serious don’t ask for NDA’s that often simply because they know what they’re buying when they buy our time and we generally know who they are and what they do. So the NDA gets skipped pretty quickly as we get right down to some kind of contractual services agreement. These are usually extremely reasonable in nature, since we’re not going to screw a client, and a client who likes our work and wants to be able to hire us again isn’t going to screw us. We protect their IP, and in return they don’t make non-compete clauses so broad that we can’t do non-competitive business elsewhere. The only time you see an NDA out of one of them is when they’ve got a piece of extremely new work where there’s already some exploratory research behind it, and some of the old rules of the game don’t apply. But that’s an exception, not a rule with larger clients.
    The other place we see NDA’s — too many, in fact — is with the startups. And too many of the startups have no actual work done at the point they contact us. They have an idea, and that’s it. And I have to break the news to them that if they’ve had an idea here in Austin (where we are), two other people in Austin have also had it, three people in Raleigh-Durham have had it, three people in Chandler, Arizona have had it, five people in Boston have had it, and between seven and nine people in Silicon Valley have had it. So essentially they have nothing.
    A few years back I gave a talk at SXSW entitled, “Your Idea is Worthless.” And I drove home two points: The first was the one I make above. The second is that ideas are not in short supply. I have half a dozen good ones every day. Would you like one? I’ll GIVE it to you FOR FREE, because I simply don’t have the time to chase it. The constraint on a startup isn’t the idea. It’s the time to develop it, the money involved, and the willingness of the executive team to bust butt to make it happen. That *is* in short supply.
    That talk resonated with a few people (mostly the VC’s and angels), but it went over like a lead balloon with the rest (mostly the aspiring entrepreneurs who were planning on launching “a killer cell phone app for social networking” and cashing out as multi-millionaires inside six months).
    Frankly, Scott Adams nailed this one a few years back. And this cartoon about sums up “ideas” — and by extension, NDA’s.

    1. Thanks for taking the time to comment Eric. I can imagine how your talk was received, although entrepreneurs tend to agree the “if you build it they will come” mantra is a fallacy, it’s like they still secretly believe it’ll be different for them.

      Love that Dilbert cartoon, it really captures the issue elegantly.

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