Attack of the non-disclosure agreement (NDA)

Let me preface this by saying that non-disclosure agreements (NDAs) do have a place. They're often useful in consulting or contract work, as they can help protect both parties by restricting access to trade secrets or private information. This post is not about that situation.

Speaking of which, if you're doing contractual work and signing unilateral NDAs (NDAs that only protect the other party), you're doing it wrong. Any time you sign an NDA, you should really make sure that any private information you're providing is just as protected as the information of the other party (i.e. a bilateral NDA).

Anyway, back to the point. This post is about the all-too-common mistake of bringing NDAs into discussions about startups or ideas. Let me briefly explain why it's bad for both parties, and can be even worse for the approached party.

If you're asked to sign an NDA:

Don't sign the NDA. Seriously, don't do it. Remember, I'm not talking about doing contract work for some company here (though you need to be careful there too). I'm talking about someone approaching you with an amazing business idea that they can't tell you anything about until you sign an NDA. Why shouldn't you sign it?

1. Even if you sign the NDA, hear about the idea, and decide to part ways forever, the NDA will follow you. Because you don't know exactly what the person is going to tell you after signing the NDA, you're putting yourself in danger of essentially entering a non-compete agreement.

   Imagine this (oversimplified) scenario. You sign an NDA to hear somebody's idea about making appointment-scheduling software. At some point during your discussion, they disclose that doctors' offices are willing to pay 500% more than other businesses and make up 95% of their customer base as a result. Let's say for the sake of the example that you already knew this about doctors' offices (or at least had a hunch based on doctors' salaries).

   A year later, a friend of yours has an appointment-scheduling software startup and he's trying to figure out what type of customer to target. If you mention that doctors are a good demographic to target, you risk violating the NDA you signed a year ago. And if the person from the NDA catches wind of your involvement with your friend, you're risking a lawsuit.

   Even if you can adequately defend against such a lawsuit, is it something you really want to risk being involved in? Probably not.

2. Asking someone to sign an NDA just to hear about an idea anymore can be (and often is) seen as a sign of amateurism, because there’s a common belief in the startup world that ideas are basically worthless. Paul Graham remarks that the market price [of an idea] is less than the inconvenience of signing an NDA. He's not alone either, as a quick search of google will show you a multitude of startup veterans that are against signing NDAs in cases like this.

   Ask yourself this. Do you want to work with an amateur? This may not be a deterrent, especially if you're new to startups yourself, but it's still something to consider when making decisions about your time and livelihood.

3. Being asked to sign something that protects the other party immediately indicates distrust within the relationship. How would you feel starting a relationship on a foundation of distrust?

If you want someone to sign your NDA:

Don't ask them to sign the NDA (probably). If you have real trade secrets or private information to protect, you can probably discuss enough with the person to figure out if you'll move forward first without giving anything private away. If you discuss the work at a high level and both parties still want to work together, you can consider an NDA if absolutely needed, but be as specific as possible about what information the NDA protects. Blanket NDAs will and should scare a lot of people away.

Are you asking the person to sign the NDA just to prevent them from stealing your idea? This is probably a terrible idea, and here's why.

1. By forcing anyone that hears your idea to sign an NDA, you are losing out on partnerships with some of the best developers and partners. These people have enough experience in the startup world to know that signing NDAs is dangerous.

   Instead of finding talented, experienced people to work with, you'll turn people off from ever wanting to work with you by suggesting they sign an NDA.

2. You're missing out on critical feedback if the only feedback you've received is from people who have signed an NDA. As many people won't bother to sign it, you're turning away free, valuable feedback. Without this feedback, your product may end up being poorly executed, causing your launch to fail.

   I really recommend reading our previous post on this topic if you're not sold.

3. Unless the person you're asking to sign an NDA is a long-time friend, you're probably putting them in an awkward social situation. Being asked to sign an NDA can indicate distrust. Consider if you really want to risk the trust in your relationship by introducing an NDA into it.

Is there ever a reason to sign an NDA?

Of course. In the realm of discussing startups and ideas, there are a few instances where it's reasonable to expect an NDA. It's completely reasonable for the person providing the NDA may have some confidential information that needs to stay private. My point I hope to convey is that signing or issuing NDAs without serious consideration is dangerous for all parties involved. Unless you're doing business together, there's usually a way to get around needing an NDA just to have a conversation.

In closing

I avoid signing NDAs with anyone unless it's during contractual work for a corporation I trust, and I recommend you do too (in nearly every case). In the few cases I do sign an NDA, the NDA is limited to protecting only the specific information necessary for my involvement, and I only sign it after discussing the project at a high level first to understand what I'm getting into. I almost always add my own provisions to make the NDA bilateral as well. While this may occasionally limit the number of projects I learn about, I've never found myself to regret it yet.

We're not lawyers, so do not take any of this as legal advice. If you have questions about the legality surrounding NDAs, contact a lawyer.