When aspiring start-ups (or fast-growth companies) set out to secure funding and further cement their brand, many entrepreneurs believe that any conversation requires first securing a non-disclosure agreement aka NDA before sharing their pitch—whether with a prospective investor, a vendor or even a next-door neighbor.
Throughout my own 25+ years, during which I’ve been a public company CEO, as well as an advisor to venture capital and private equity firms, I’ve been asked to review proposals from dozens of companies extending across a broad spectrum of industries (notably, many were technology-centric). I’ve also sat on the other side of the table while serving as a principal stakeholder representing a variety of entrepreneurial initiatives. Inevitably, the topic of executing an NDA was the first talking point—one that I vehemently eschewed.
My view has always been “ideas are great, but the ability to innovate supersedes any argument that a non-disclosure agreement is a requisite to a productive discussion.” My position has always been that imposing an NDA before even engaging in a preliminary discussion is superfluous. If someone wants to try and steal an idea, an NDA isn’t going to stop them. In fact, what often stops (and always slows) a conversation before it starts is haggling over the terms of an agreement that is terribly difficult and terribly expensive to enforce. What will stop them is the inability to execute (aka innovate). That’s always where the rubber meets the road.
Lo and behold, Eileen Zimmerman of the NY Times profiled this exact topic in a strong article in today’s edition within the Small Business section. Here are some excerpts from Eileen’s article:
It is a common quandary, and not just in Silicon Valley. Ten years ago, it was not unusual for entrepreneurs to request and potential investors to sign nondisclosure agreements. But today the agreements are largely considered a thing of the past. In fact, some investors say they walk away from a founder who even suggests signing one.
Thom Ruhe, vice president for entrepreneurship at the Kauffman Foundation, said the declining use of N.D.A.s “is certainly not in the interests of entrepreneurs. It favors the V.C.” Although it is rare that an investor steals an idea, Mr. Ruhe said, it does happen. “But in the skewed echo chamber of the Valley, and the sycophantical networks that aspire to be just like them,” he said, “they’ve made the easier and less morally defensible position — no N.D.A.s — the coin of the realm.”
Even if a start-up manages to get an agreement signed, it can be tough to enforce, said Aaron I. Messing, a lawyer with OlenderFeldman in Summit, N.J. “It’s very hard to prove that you kept information confidential, and it was only disclosed under an N.D.A.,” said Mr. Messing, who represents both founders and investors. “And it can be expensive.”
Below are some guidelines to consider. They apply when engaging not just investors, but also manufacturers, partners and even customers.
DO NOT ASK UNLESS YOU HAVE SOMETHING TO PROTECT. Chris Schultz, an entrepreneur and partner in the angel investment fund Voodoo Ventures in New Orleans, said: “Everyone thinks their idea is extremely unique, but the idea is really 1 percent of the value. The value is in the execution.”
KNOW YOUR AUDIENCE. Before making a pitch, research the background of your audience. “Think through who you are sharing your ideas with,” said Patrick Riley, head of Global Accelerator Network, a group of 50 start-up accelerators worldwide. Mr. Messing advised making sure an investor did not have potential conflicts or overlapping investments. Reputable investors, he said, “have much to lose by stealing your idea.”
CONSIDER FILING FOR A PROVISIONAL PATENT. C. Andrew Keisner, a lawyer with Davis & Gilbert in New York City who regularly counsels investors and start-ups, said the reluctance to sign N.D.A.s was one factor driving start-ups toward patent protection. “If you’re far enough along that you’ve developed an app or a prototype, there is a big advantage to filing a provisional application,” he said.
PROCEED GRADUALLY. When discussing a start-up, founders should walk a fine line, conveying sufficient information about what is unique and proprietary, but not disclosing information that would let someone replicate the business. For example, said Mr. Messing, the lawyer, an entrepreneur could disclose “what an algorithm can do, but not the algorithm itself.”