To NDA or Not to NDA? That is the question.
Oct 3 2007

When I taught entrepreneurship at The University of Texas at Austin business school many students asked about the importance of Non Disclosure Agreements (NDAs) which are also known as Confidentiality Agreements.

I have observed a shift in their importance since the late 90’s (when I was starting my first high-tech company) to now.  In my experience, they don’t seem to be waved around as much as they were in the past.  I think this is because more tech businesses are Internet based and really don’t have that much proprietary information to protect.

Also, there seem to be fewer patentable Internet ideas and it’s much harder to claim exclusive ownership of a piece of technology with so many open source software applications available like WordPress, Linux, Bugzilla, etc.   [UPDATE: I just saw on Scobelizer — Scoble is a big .NET idiot — that Microsoft’s .NET development environment is being shared sourced, which is one step closer to open sourced.  Wow!]  Only a few Internet giants like Google and Amazon have patent protected algorithms for search and product optimization that are actually protectable if someone tried to violate them.

I have now begun to see business related discussions occurring prior to signing an NDA.  Maybe this means we are trending back to our “word” being as important as a written agreement stating we won’t divulge the other party’s trade secrets or other information?  I certainly hope so because I know those NDAs can sometimes be pretty worthless depending on what you are discussing.  Especially in medium to large sized business whose employees often have no idea what confidentially agreements have been signed with whom and about what!

If you are a high-tech entrepreneur here are some occasions where you will most likely have to sign their NDA:

  • When discussing a partnership relationship with a large corporation such as Microsoft®.
  • If a customer wants to buy a gazillion of your widgets, licenses, products, etc. A good problem to have!

Here are some occasions where you will want to have someone sign your NDA or a mutual (a.k.a. two-way) NDA of your approving:

  • Hiring employees or consultants
  • Execution of a large business deal that will require a lot of interaction between your company and another
  • If you’ve actually invented the time/space transporter in Star Trek then you should get everyone to sign one! 😀 Beam me up Scotty!

Finally, here are some occasions where you should not ask to have someone sign your NDA (unless you’ve invented the transporter mentioned above):

  • When seeking money and/or advice.  Most reputable Angel or Venture Capital investors will not sign an NDA because they see so many deals.  It would not make sense for them to put themselves at risk for any potential lawsuits.  If you are pitching some great XYZ Internet deal and you are in Texas you can bet someone else is pitching them a variation of XYZ Internet deal in California. If you want their money badly enough and the investor has a good reputation, then you will just have to play by their rules.
  • When you are negotiating with a large company such as Microsoft. You will most likely have to sign theirs or just choose not do business with them.

There are many great ideas out there so don’t make the mistake of thinking that your idea has not been thought up by someone somewhere in the world.  In my opinion, the difference between an idea and a company is execution (blood, sweat, tears, right decisions, wrong decisions, hiring, firing, bringing the right people together, etc.)!  If someone can steal your idea and create a profitable, successful company in 6 months then see if you can get a cut up front and let them do it.  It’s always better to have a small piece of a huge pie than 100% of a non-existent pie!   If you can’t get a cut, then just come to terms with the fact that they deserved the success because they orchestrated the variables to make it happen and just don’t tell them your next big idea!

Since it’s important that my student’s learned this concept, I often brought in Gary Hoover, founder of Hoovers, BookStop, and TravelFest as well as author of Hoover’s Vision as a guest speaker.  He says he talks to so many businesses and students that when someone asks him to sign an NDA he proceeds to ask them ‘Why?’ and immediately wonders about the viability of the concept.  Talk about a serial entrepreneur!

IMPORTANT:  Just because you sign an NDA you do NOT HAVE TO disclose your confidential information.  You can choose not to share certain pieces of information.  Often people think that if they’ve signed an NDA they have to put all of their confidential information on the table.  If you sign something with Microsoft, they are not all of a sudden going to give you the software designs of their operating systems so in the same vein you as a small business owner do not have to tell them about your secreat weapons.  Believe me…sometimes I wish I had just kept my mouth shut….

However, the above is just my opinion so despite what I’ve written it’s always best to consult with an attorney.  Just a forewarning, they will most likely tell you to have everyone and their dog sign an NDA.  They are after all lawyers.  🙂

If any of you are lawyers, pretend to be one in your spare time, and/or have anything interesting/funny to share on this topic, I’d love to read your comments.

UPDATE on Oct 8, 2007: After reading my post, Gary Hoover had the following to share:

On my reference to NDA’s, my points are these:

1) If you have an idea that is easy to grasp and easy to copy, one that everyone says “I wish I had thought of that,” you may not have a very good idea; the best ideas usually are not so easy to grasp

2) Anyone who would steal an idea and copy it likely does not have what it takes to carry it out; real entrepreneurs have more than enough ideas to last a lifetime and don’t need anyone else’s ideas to the pile!

Of course if you really have invented a cure for a disease or some other magical thing, or if you are talking to giant corporations about your idea, you should protect it. but that is rarely the case with the entrepreneurial ideas I usually hear about.

I pretty much refuse to sign NDA’s these days. They are a mark that bureaucrats and lawyers are making the decisions, not entrepreneurs, and that scares me. Too often I have bothered with NDA’s in the past only to find “is this all you were hiding?” no one would steal this!” Of course since I am not the entrepreneur with that particular vision, I could be wrong. But having people sign an NDA is so often just a distraction to the entrepreneur and the signer.

The outbreak of NDA’s over the last 10-15 years often reflects a paranoia, a sense that “I have this great idea and someone might steal it so I better keep it under a lid.” Venture Capitalists often think this way, entrepreneurs rarely do. When I develop a new idea, particularly one that is well outside “the box,” I find it useful to talk to many many different people about it, to strangers on planes, to people I meet socially, and so on. The more people who react and comment on it, the better my research. That does not mean they are all correct – I usually learn something whether they love the idea or hate it. You have to ask “why do you love it” and “why do you hate it?” And you have to take their lifestage, background, and preferences into account. I don’t know that my mother thought any of my ideas were particularly good, and Hoover’s probably seemed particularly silly to her.

Gary E. Hoover
Chief Storyteller, RoadStoryUSA
CEO, Story Stores, LLC

Author: | Filed under: entrepreneurship | Tags: , , , , , , | 2 Comments »

2 Comments on “To NDA or Not to NDA? That is the question.”

  1. 1 Code Vault » Blog Archive » On NDAs and My NDA Policy said at 1:49 PM on July 6th, 2008:

    […] Also of interested are the other linked articles such as To NDA or Not to NDA? That is the question. […]

  2. 2 said at 10:18 AM on September 27th, 2008:

    To NDA or Not to NDA? That is the question. | entrepreMusings…

    If you are a high-tech entrepreneur here are some occasions where you will most likely have to sign their NDA:
    * When discussing a partnership relationship with a large corporation such as Microsoft®.
    * If a customer wants to buy a gazillion of…