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Friday, January 29, 2010

The myth of the NDA

I have been asked in some strange situations to sign an NDA, and never thought to ask a VC to sign one, I found this post by Christian Mayaud www.sacredcowdung.com and I think it will help those who struggle with this topic. I have just worked out the cost of managing NDA's for this project I have been working on for the last two years and it comes close to £100k.

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."

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 being 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, 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." )

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
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

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

1 comment:

For Rent By Owner said...

Amazing photo...
Thanks for the post...