NDAs for startups
We hear a large number of pitches here at DeveloperTown. Some weeks we only hear one or two, and other weeks we can hear up to twenty pitches. It’s one of the more enjoyable parts of my job. Everyone is excited about his or her idea. And it can be contagious. I love it when by the end of the meeting I’m excited about their idea too.
One of the most common questions we get asked before someone comes in to pitch is what (if anything) the entrepreneur should do to protect themselves and their intellectual property before the pitch. The most common way entrepreneur’s are advised to manage this risk, is to get people to sign Non-Disclosure Agreements (NDAs) before they share their ideas. There are several reasons why we believe this is a bad idea.
You’re already not getting enough feedback.
Most entrepreneurs don’t get negative feedback. We live in a polite culture (especially here in the Midwest), where people are supportive and want you to be successful. They also don’t want to be the one to crush your dreams. So most of the time, if you pitch someone an idea, they’re going to say something like, “You should do that, follow your dreams!” or “I’m sure there’s a market for that somewhere. I just don’t know enough about it to give you valuable advice.” Or they will pick out the two or three most positive things, and focus on those.
Most people don’t want to be critical. They won’t challenge the idea with the goal of making it a better idea. If you want valuable feedback on your idea, in many ways you have to go to the people with an economic incentive to tell you both the good and the bad. Those are (in priority order): your potential customers, the team that will have to build or deliver that service, or your potential investors.
NDAs create a barrier between you and those groups You don’t want that barrier. You need the feedback. Anytime you ask for someone to sign your NDA, you’re giving them an excuse to not talk to you about your idea. But more importantly, you’re less likely to even ask them in the first place because you’ll be afraid about sharing and talking about your idea. Talk about it.
You’re protecting against one of the least likely reasons you will fail
A lot of technology ventures fail. We have seen a number of our own portfolio startups fail. One of the least likely reasons you will fail is because someone else steals your idea. It’s more likely you:
- won’t get funded;
- will never actually get the product built correctly and successfully launched;
- won’t find product market fit fast enough and you’ll run out of money;
- will get into a big fight with your co-founder(s) and the team implodes;
- get traction with a small segment of the market, but can’t break through and end up failing anyway due to market competition.
I know, right? This isn’t a feel good blog post. Sorry.
Bad people do steal ideas. We think we’ve seen it happen to one of our customers. But it happens very rarely. And even in the case where we think we saw someone steal a client’s idea, the person who stole it (and built it) failed. That business is gone, and they’ve pivoted into something completely different. And as harsh as it is to hear, to me that sounds about right. You need a good idea, but you need way more than an idea to be successful.
Some people can’t sign your NDA for liability reasons
You should do an internet search for the phrase “Why VCs can’t sign your NDA.” You get a lot of results. My personal favorites are from Feld, Kawasaki, and Startup Lawyer. I love the phrase from Startup Lawyer, “Asking a VC to sign a NDA is tantamount to splitting 10’s at the blackjack table.”
If a company makes its living hearing pitches for startups, it hears a slightly different version of the same pitch anywhere from 2 to 20 times a year. Most ideas aren’t new, aren’t unique, and aren’t proprietary. Sometimes they are, but those are the exception. In cases where your idea isn’t unique (which no one can possibly know until they’ve already signed the NDA), then that firm has opened itself up to potential liability if choose someone else’s version of the pitch over yours.
That means each time an investor (or a firm like ours), signs an NDA, they are leaving a small trail of liability behind them. Regardless of if they end up working with that prospective client.
How are entrepreneurs protected in these situations? Because the person you’re pitching to in these situations is putting their public reputations on the line. We’ve build a nice successful business at DeveloperTown. It’s already a multi-million dollar idea. Trust me… we don’t need another one to manage. This one is enough. We aren’t going to jeopardize this business by stealing someone else’s idea. Not only am I fairly sure the idea isn’t unique; we’d be starting over again with all the risks a startup has. (See that uplifting list of reasons for failure five paragraphs up.)
You need to work on your elevator pitch anyway
All of that means you need to be able to talk about your idea at a high level – with a bunch of different people. In some cases just so you can get feedback. In other cases so you can hire employees or vendors. And certainly if you want to fundraise. You should always be able to talk about your idea – any idea – at a high level with out exposing the secret sauce.
If you can’t talk about your idea in 30 to 60 seconds without giving away what you think is the “magic” in that idea, then we would be very skeptic that someone else hasn’t already thought of it or could think of it relatively quickly. So think of this as your chance to get really good at telling people what you’re doing, without giving away the secret sauce. If you have something that you think is actually patentable, don’t talk about that in detail. Just give the exec-summary. You can still go protect the IP.
NDAs at DeveloperTown
So when do we like to sign NDAs? Once you become our client. As soon as you become a client, we include an NDA in every statement of work we send out. We absolutely want to protect your intellectual property. Because once you’re a client, there’s no longer a risk of you coming back to us years later saying we chose someone else’s version of your idea. Clearly… we chose you.
We will also sign NDAs when a large enterprise client approaches us to see if we can help them with innovation. The incentives are different for large firms. And the type of information and they way they share it is different as well. In many cases, it’s not just a pitch. It’s real market data, proprietary data from their other existing products, and other rich sets of data we can apply to the problem they are asking us to help them solve. There are also (in most cases) non-IP related barriers to entry with the products being pitched that these companies can overcome that others couldn’t.
So schedule some time to talk with us, know that we put our reputation on the line each time we sit down with someone, and we’re excited to give you both positive and negative feedback. We love helping people start businesses. In many cases we view it as part of our role in the Indianapolis startup community to give feedback to startup ideas, knowing full well that we aren’t likely to be the partner you may choose to build with. It’s just part of what we do.