Disclosing Startup Secrets

My advisor told me not to bother having other companies sign NDAs because they are “worthless,” and not to have our lawyers review outside NDAs because it would just waste our money. Is this good advice?

There are two pieces of advice, the first of which is not to have others sign NDAs (non-disclosure agreements) about your confidential information. If you truly do not care about everyone knowing the details of your business, you have a secret zeal to share all your research and innovations with others gratis, or you enjoy creating markets for your competitors and then letting them take the opportunity for themselves, this advice will serve you well.

For most startups, however, this advice is grossly incompetent, to the point where I recommend you terminate the relationship with this advisor. Anyone who can give this advice with a straight face is unqualified to advise startups. Seriously.

I can list dozens of reasons, but let me give just a few. If you fail to restrict the confidentiality of your information, you lose much (if not all) of your ability to patent your innovations that you reveal. Further, you also lose all your trade secret rights in whatever is disclosed, as the information is, well, not a secret any longer. Forfeiting patentability and trade secret protections not only gives free reign to your competitors, but also enables your soon to be ex-employees to use your information without restriction, as you have waived the confidential status of all information you have disclosed without an NDA.

Similarly, if a potential buyer reviews your company for a possible merger or acquisition absent an NDA (ideally one with a strong non-solicitation clause) that acquirer would be free to hire any of your top performers, armed perhaps even with your evaluations, compensation information, and other insights you reveal to them without protection. Why buy your company when the potential buyer can just hire your best people directly on the cheap? Even when companies do have NDAs, such employee stealing is a blight in the startup world. Why make it easy?

NDAs define who may use information you reveal, how they may use it, for what purpose, and what happens with the information going forward, especially if a deal fails to materialize. Do you really want to leave this all to the ethics of your competitors?

Most companies are loathe to develop a billion dollar opportunity simply to let others exploit it freely and poach your key employees to boot. Perhaps you do not care that the world would be free to use the knowledge you worked hard to develop. Your investors, however, may feel differently, if you can ever get any following this advice. Why work hard to achieve success, only to rescue defeat from the jaws of victory?

With regard to the second gem of advice, not reviewing NDAs given to you, this is startup malpractice regardless of circumstances. Aside from including only “standard” terms, other companies sneak “gotchas” into NDAs all the time. Perhaps the other company gets a perpetual, royalty-free license to anything you reveal to them, or they get joint intellectual property ownership of ideas discussed. Perhaps the NDA has other squirrelly terms, like an investment right, rights of first refusal, a prohibition on competition against their core products, most favored customer pricing, or an exclusive right to license your technology for a fixed period. Maybe you agree never to sue the other company for patent infringement. If you sound shocked, understand that all of these terms are real examples of NDA torpedoes I have seen in my career, and who knows what former clients signed in NDAs I did not review.

The law presumes you are sophisticated, read what you signed, and received proper advice, so good luck getting out of a blindly signed NDA after the fact. I also do not recommend self help, as you often will not appreciate subtlety of language and phrasing. Any company malevolent enough to insert an underhanded clause is also smart enough to phrase and parse language carefully.

That all said, NDAs are sometimes overrated, especially if you literally care nothing about the patent rights. Other companies do steal trade secrets routinely, even with signed NDAs. Relying upon them as your exclusive means of defense is often illusory, as legal process outcomes are only loosely correlated with truth and justice (and always correlated with high fees). But a strong NDA is better than no defense at all and will sometimes give you just the leverage you need. Just ask all the companies who invented world-beating new technologies only to watch them stolen by competitors or ex-employees.

Sometimes other parties will not sign an NDA at all, such as venture investors (at least before certain forms of diligence commences) and larger companies who review unsolicited inventions. In those cases, use thoughtful strategies so you only reveal what is minimally necessary and will not destroy important IP protections.

As a final thought, I have heard advice like this over my career from people who enjoy being contrarian for its own sake, or who reflexively react negatively to all forms of protection of ideas out of some misguided belief that all innovation should be free to use by all. I spent a lot of my career helping pick up the pieces of broken startups when others stole an entrepreneur’s dreams. Oddly, the clever contrarians were never to be found in those aftermath moments.

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