Of Non-Disclosure Agreements and Startup-Investor Relationship

[I have very often came across startups who want to sign a NDA, before discussing their idea – they are too scared of their idea being stolen/taken away by somebody else (without realizing that the biggest barrier is execution, and not day dreaming). This article by Sanjay Anandaram, nails down the details and provides a great perspective on the issue many entrepreneurs/ investors deal with.]

“Here’s a NDA (Non-Disclosure Agreement) – please sign it”, said the entrepreneur. His face fell and he looked almost hurt when I told him that don’t sign NDAs. It is simply impossible to keep track of the business ideas and plans that get discussed with various entrepreneurs. There are also many ideas and plans that sound and indeed are similar in concept if not in all details. One would open oneself to needless and avoidable complaints about plagiarism and favouritism if NDAs are signed.

So, how does an entrepreneur “protect” his business plan or “idea”?

Every entrepreneur actually believes that his/her business plan is singularly unique and that it will change the world if only capital were made available. While it is important for every entrepreneur to believe in his/her plan, it would be arrogant to assume that no body else has thought about it either.

non disclosure agreement - Startup vs. Investor

non disclosure agreement - Startup vs. Investor

Most businesses are the types that could be classified as “better, faster, cheaper.” In other words, they take an existing mode of delivering a solution, value-add around this solution by better orchestration of the eco-system, usage of technology and greater operational excellence and deliver “better, faster, cheaper” solutions to existing problems. The real key to their success lies therefore in their ability to relentlessly execute to their plan day after day, acquire customers and be financially viable. There’s little or no real intellectual property in these companies.

On the other hand, there’re a miniscule number of companies that are actually developing fundamentally new business models and technologies that can radically alter existing value propositions to customers. These types of companies tend be staffed by top class technologists and experts from the relevant business domain. Intellectual capital and intellectual property are the bedrock of their existence. Patents are used, among other ways, to fiercely protect their intellectual assets. Even in such scenarios, unless important formulae, critical and unique business processes and crucial algorithms are discussed, NDAs are rarely signed by professional investors.

When one goes to a doctor or a lawyer or a chartered accountant, one doesn’t sign a NDA in spite of discussing deep personal matters. Why? Because there’s a sense of trust and faith and sometimes even helplessness. Their sense of professional ethics prevents them from discussing specifics of a case with anyone else.
Similarly, entrepreneurs need to understand that professional investors too have a code of conduct and business ethics that prevents them from discussing specifics of a plan. It is also important for entrepreneurs to have done their home work about the investor and learn how to discuss the details over multiple meetings. In any case, if an entrepreneur believes that the mere disclosure of his/her business plan jeopardizes its prospects, then it is probably too fragile to fund in the first place!

In the case of a public company, the following details are well, public. The capital structure and financials, the valuation, the management team details, the business model, the solutions offered, the kinds and names of key customers, the new strategic initiatives being planned. These companies have to brutally compete in the market where there are rarely any real secrets or at least (short-lived ones).

So why then are private companies so wary about their details? Given that they are private, they are under no obligation to share details; but then even if these details become known, why should it impact the company? After all, investors, key senior employees, key customers and partners will all want to know details of the company to make sure the company is worth partnering with. Details are to be shared with these constituencies and needless and excessive secrecy around the company can only harm it, in today’s day and age. While it is important to keep a healthy buzz around your company, it is important that this buzz be created by happy customers, employees and partners rather than through contrived means.

What do you think?

[The article first appeared in FE and produced with author’s permission.]
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