Tell No One: Here’s the Story Behind Non-Disclosure Agreements

Aug 23, 2017 | Greg Jackson

You have what you think is a pretty fabulous business idea. You have a detailed business plan with costs and sales numbers that prove your plan is a winner. You even have a dynamite name and logo that perfectly describes your company. And now you’re afraid to show it to anybody outside the house because you don’t want to get ripped off. Of course if you don’t share it you will never raise any money or find partners or suppliers or even potential customers, you’ll just keep driving your wife crazy talking about your million-dollar idea.

So what should you do?

Disclosure About Non-Disclosure

The conventional first step is ask whomever you’re going to share the deal with to sign a Non-Disclosure Agreement, or an “NDA.” There are dozen of templates online. For legal reasons I’m not going to suggest one over the other but read a couple to inform yourself of what you’re asking people to sign. They’re all similar. Essentially it says whoever signs is obligated not to tell anybody about your pitch without your permission and if they do you have the right to sue them until they beg for mercy.

There are other clauses, too:

  • Non-Circumvent. This prevents a partner from sneaking around behind your back (circumvent) and selling directly to your customer.

  • Non-Compete. This tells an employee that he/she can’t quit and go work for a competitor for a specified period of time. (California, Oklahoma, and North Dakota don’t recognize non-compete clauses and the other states have all kinds of different caveats — they don’t apply to doctors, lawyers, and broadcasters, for example, or the wording must meet the test of being “reasonable.”)

So your pitch is safe with non-circumvent and non-compete clauses all folded nicely into your NDA, right? No.

An Ounce of Prevention Is Worth a Pound of Lawyer Fees

I have signed and asked others to sign at least a dozen NDAs in my career. I spoke to four entrepreneurs involved in scores of new businesses. None of us have seen an NDA actually litigated. One told me he doesn’t sign them and doesn’t ask anyone else to do so either, because he doesn’t think they’re “worth the paper they’re written on. If somebody’s going to steal from you, they’re going to steal from you.”

I don’t entirely agree. It is true that enforcing an NDA in court can be an exhaustive and expensive experience — you have to prove who knew what, when and where, who they did or didn’t tell about the information you shared, and then prove what your alleged damages are. On the other hand (and this is a plus for small businesses): NDAs are cheap. You don’t need a lawyer. Search “free NDA form” online and you’ll find dozens, all written by lawyers.

This one offers four different categories of business relationship, so it’s a good jumping-off point. But the NDA document has to be tailored so as to outline what the venture is all about so that the signer understands what is to be held confidential. In other words, a degree of specificity is important. It’s easy. There’s a prompt that asks what’s the NDA pertains to.

Though it’s no guarantee of security, a well-tuned NDA can be a starting point in a later dispute. It creates a paper trail that can be intimidating enough to lead to a settlement out of court.

Proceed Cautiously

Some people will be offended if you ask them to sign an NDA. Many won’t because they know what you think is a one-in-a-million-idea is just a variation on a broader theme and they don’t want the hassle of proving that. Venture capitalists, for example, see and hear dozens of pitches that are remarkably similar.

What to do? First, don’t walk in the door waving your NDA. Know who you’re sharing with and keep the opening pitch intriguing but general: “This is a product for cows that makes their milk taste like ice cream, and it might cure cancer.” If you determine real interest and get further into discussions, ask for an NDA before you reveal proprietary information. If are going to bring somebody on board and pay them you should consider an NDA and a non-compete in return.

Finally, do not depend only on lawyers. Learn about the options. If you’re going to spend years of your life getting a venture off the ground, you should be familiar with the ways to protect the operation in its infancy.