As an advisor to entrepreneurs, I often have to deal with people who are convinced that they must get me to sign a non-disclosure agreement (NDA) before they begin talks about their new venture. They seem shocked to learn that most professional investors and advisors, myself included, routinely decline such requests, due to costly litigation and administrative nightmares.
My view is that non-disclosures won’t protect you from unscrupulous business contacts, so you simply shouldn’t deal with the flood of unknown people who will contact you via the phone or Internet. Stick with people you meet through warm introductions, or count on the integrity of professionals who have a visible reputation and references, instead of a legal document.
Yet I recommend to every entrepreneur that there are still situations where an NDA (sometimes called Confidential Disclosure Agreement) makes sense compared to normal situations, where your risk of losing an investor or advisor is greater than the risk of your idea being compromised. Here are my guidelines for when a signed agreement is required, versus other alternatives:
- Insist on a two-way NDA for partner negotiations. Most often, your best partners are in some way a competitor, or already in a business complementary to yours. They could easily copy your business, so a mutual non-disclosure is required for protection in both directions. It pays to talk to competitors about the business, but not your business.
- Get an NDA before detailed patent disclosures. Entrepreneurs should never disclose the details of a planned or current patent application to any outsiders, until after a non-disclosure or other contract has been signed. Potential investors don’t need this data, except perhaps as part of a final due diligence after an initial signed agreement.
- Never disclose trade secrets without a contract. Some entrepreneurs avoid the patent process, since patent details become public once a patent is issued. Trade secrets, which may be recipes, formulas or processes, should only be disclosed on a need-to-know basis, even to employees, and then always accompanied by a contract.
- Don’t ask for an NDA from trusted investors and advisors. If you are approaching a recognized venture capital group, or even an accredited angel investor, a non-disclosure agreement is counter-productive. These professionals value their integrity, like your therapist or financial advisor, and will not share your business details nor steal your idea.
- Don’t even respond to unsolicited requests for details. If you receive an email or phone call requesting details on your plan from someone you don’t know, don’t assume that asking them to sign an NDA will protect you. The same is true for strangers who may approach you at networking events or industry conferences. Prepare a high-level pitch.
- Read NDAs carefully for scope and duration. In today’s world of rapid innovation and new technologies, any individual or company should be hesitant to sign an agreement that limits their activities for more than two years, or is too broad in scope. If a longer term or scope change proves necessary later, any agreement can be amended as required.
In my experience, trying to tantalize a person of interest to you by dangling an NDA for signature, almost always backfires, to define you as too risk averse or paranoid to be a successful business person. In fact, if you have a good idea, you need smart investors and professionals to spread the word to other good people, so you really want them to talk and get feedback for you.
I also recommend that you practice explaining your concept in marketing terms through social media, networking opportunities, and crowdfunding. If that doesn’t get any attention, the details probably don’t need protection. Demanding an NDA too early is a sure way to kill your dream before the people who can help you even know what you have to offer.