NDA or not to NDA, that is the question…

As advisors and instructors we often get questions about protecting intellectual property, and we occasionally get asked to sign confidentiality or nondisclosure agreements, aka “NDA”s. Our experience is that in most cases, early-stage entrepreneurs overstate the value of an NDA and underestimate the amount of time and headache they cause, leading to a net negative return on investment on the effort expended.

An NDA basically attempts to serve two purposes – first, it helps protect against public disclosure, which could potentially make the information publicly disclosed unable to be protected by a patent. Second, it protects the person (or organization) with the secret from the person (or organization) receiving the secret using the information – such as telling a competitor, or developing their own business based on the specific information disclosed. These goals make sense on the surface, but there are common problems facing early entrepreneurs with few, if any, resources.

First is that for a contract (like an NDA) to have weight, it typically needs to be an exchange that involves consideration. An example: I give you money; in exchange, you agree to keep my information secret, and if you don’t, you will be subject to penalties X, Y, and Z. A promise not to disclose in exchange for nothing in return doesn’t fulfill the need for consideration. It’s also pretty imbalanced – if there’s nothing going the other way, why would the person sign?

Second, it is unlikely that a conversation with an individual or small group will lead to a public disclosure that causes an inability to patent the secret. Partly this is because a private conversation is unlikely to be public disclosure (a good summary of public disclosure from Stanford is part way down this page), but it’s more because it’s unlikely that you will give your conversation partner enough detailed information about your invention that they could do it themselves. As an entrepreneurial advisor, I care far less about how your invention works than what it does and who it’s for. The number and alignment of the dilithium crystals may be the patentable IP, but it isn’t relevant to the entrepreneurial conversation. The ability to travel warp speed, and which customers may find that as a solution to their problems that they’re willing to pay for? Now that’s an interesting conversation. I don’t need to know how it works.

Last, a contract such as an NDA is only as good as the participants’ willingness to actively enforce them. To do so, you’ll need to identify a specific breach that you can then take to an attorney who would be willing to take your case, in the hope of obtaining the remedy laid out in the agreement. Is it worth it? Will you have the ability to identify a breach if one occurred? Will you have the resources to hire a lawyer and fight it out? Supposing you are successful, are the remedies worth it?

I’ve advised a lot of people and a lot of companies for a bunch of years and only once have I seen someone even make noise about enforcing an NDA. In this case, the aggrieved party was actually trying to assert a non-compete right, without any evidence that there had been use of confidential information. Since the NDA, signed a few years prior, did not have a noncompete provision (just a ‘you may not use the specific information you are being given’ provision) there wasn’t a there, there. Probably for that reason, after a single nasty email, they gave up.

There are plenty of times when an NDA is a reasonable and valuable tool. Often, it’s in conjunction with other, even more important legal terms, such as a consulting agreement that involves the exchange of cash (and/or equity) for services as well as an assignment of inventions back to the company and an agreement not to disclose company information.

But for a volunteer helper, advisor, mentor, or potential investor it’s rarely a good fit. When I receive an NDA, I react based on what it is: a legally binding contract with potential penalties to the signer – ie, me. Does it make sense to ask someone to give you their time, help, attention, and consideration and enter into a legally binding contract for the privilege?

One other tip – if you find yourself in a situation where someone is asking you to sign an NDA, and for whatever reason you are tempted to do so but are concerned about the terms, a simple technique that can help with negotiation is to ask for it to be mutual. In this form, each party promises the other that they won’t disclose the others’ information, or else. In this ‘what’s good for the goose is good for the gander’ format, you at least require the other party to abide by the same rules and risk the same remedies as you are being asked to abide by. Whether or not they’re willing to agree to that may give you some useful insight into how they view their own terms.

Last – I’m not a lawyer, I don’t play one on TV, and I’m definitely not your lawyer. If you have deeper questions you should consult one; there are great legal resources around the region, and you’d like a few names of firms that have experience with startup law we’d be happy to provide them. Just email us at [email protected].

Thanks to my friend and colleague Zach Shulman for his advice on this topic – he is a lawyer, just not your lawyer. Check out his blog here.