Nondisclosure agreements are legal contracts that limit one or both parties from disclosing information covered by the NDA. They can be used to protect trade secrets, business plans, customer lists, sources — in short, pretty much any aspect of business. They tend to be short and are readily understandable by non-lawyers.
You may be surprised to find that Atomic Object usually doesn’t sign NDAs at the first step of a potential relationship with an early-stage startup. We don’t do this entirely from our self-interest, we just think that you don’t really need one, and you’re better off without one.
Why an NDA Sounds Like a Good Idea
You have a brilliant idea for a new, software-based innovation that will transform lives. On the initial emotional rush of inspiration, you risk some of your pride and tell your spouse about your app idea. Instead of half-listening to you while catching up on their Netflix queue, your spouse turns off the television and starts to brainstorm with you.
The encouraging response from your spouse leads you to explain the app idea to your best friend. Your friend immediately asks how they can help you out. “Finally!” you think to yourself, “maybe I’ve really discovered it – the Idea I’ve been searching for!”
Since you believe that sharing ideas is a great way to refine your ideas, you start to ask for feedback from anyone who will listen. After telling some co-workers at a company picnic, you find yourself talking through your idea with the lady standing across from your pump at the gas station. She vehemently agrees that you’re on to something and hands you her card. The woman happens to be a lawyer and encourages you to think about getting a non-disclosure agreement signed.
You’ve never seriously considered an NDA before. But now you start to question sharing your idea with anyone before they sign one. What if the gas-pumping lawyer thought that your idea was so good, that she’s going to team up with her hypothetical tech-friend and beat you to it? What if your best friend has already started calling development firms behind your back? What if your spouse is already planning to leave you and profit off of your genius idea? You decide to never share any further information about your app with anyone. Ever. Unless they sign your NDA in blood.
Why Preemptive NDAs Do More Harm than Good for Early-Stage Startups
Unfortunately, forcing all potential partners to sign an NDA can severely handicap your ability to create a great product. NDAs can change your attitude, stifle creativity, lock you away from valuable feedback, and turn off potential partners and investors.
1. NDAs put too much focus on the idea.
It’s important, and somewhat humbling, to acknowledge that “the idea” is usually not the critical factor to entrepreneurial success. The unimportance of “the idea”, when compared with execution, has become a relatively common theme in strategic business thinking.
Paul Graham addresses it bluntly in part of a talk that he gave to the Harvard Computer Society in 2005:
An idea for a startup, however, is only a beginning. A lot of would-be startup founders think the key to the whole process is the initial idea, and from that point all you have to do is execute. Venture capitalists know better. If you go to VC firms with a brilliant idea that you’ll tell them about if they sign a non-disclosure agreement, most will tell you to get lost. That shows how much a mere idea is worth. The market price is less than the inconvenience of signing an NDA.
Brad Feld, a managing director at the Boulder, Colorado-based venture capital firm Foundry Group, made a variation on this theme in his article Note to Entrepreneurs: Your Idea isn’t Special. While a great idea helps, it’s only the beginning of a successful entrepreneurial venture. A real good idea is totally dependent on great execution.
I’ve written about the three things you need to get right to have a sustainably successful company: idea, execution, and culture. Idea is the easiest of the three.
2. NDAs make you look inexperienced.
Asking a developer, designer, angel investor, venture capitalist, or consultant to sign a nondisclosure agreement as a first step to discussing your project sends some strong signals. Unfortunately, they are probably not the signals you want to send.
To an experienced person, being presented with an NDA in the preliminary stages of discussion indicates that the entrepreneur:
- is naive about the value of an idea
- probably underestimates the importance of execution
- has little to no experience with software businesses
- has cut themselves off from valuable feedback
- would consider working with someone they don’t trust
- would consider working with an inexperienced or irresponsible person
- isn’t willing to invest the time to investigate and build a relationship
3. NDAs stifle idea sharing and creativity.
We believe most entrepreneurs would be better off sharing their idea with everybody and anybody to get feedback. Sentence three of Paul Graham’s Startups in 13 Sentences is “Let your ideas evolve.” That can and should start before you’ve spent a dime on development.
Don’t limit yourself only to vendors or partners who are willing to sign your NDA. The more preliminary discussion you can have, the better chance you’ll have at testing your idea, finding the best partners, understanding how much the work should cost, and getting advice on good technologies.
Why Atomic Probably Won’t Sign Your Early-Stage Startup’s NDA
In my experience, it is perfectly possible to have meaningful, useful discussions with entrepreneurs without signing an NDA. The “secret sauce,” if there is some, doesn’t have to be part of the conversation.
NDAs are serious legal documents. Just as you want to make sure that we’re a good fit for your project, we want to know that you’re a good fit for being our client. Atomic’s law firm says it’s a bad idea to sign one before we know the party well and understand what we’re promising not to disclose. They’re particularly not fond of NDAs that are broad and general. We try to listen to them.
An NDA becomes appropriate when the entrepreneur selects a partner and work begins. A good partner acts with integrity and respects the proprietary information of their client. The NDA codifies this expectation, and more importantly, ensures future investors or acquiring companies that the proper legal work was done to protect their investment.