Questions

Is it unwise for an entrepreneur to sign a non-disclosure agreement?

I'm a tech entrepreneur who recently met with another tech entrepreneur who is in the same industry. He wants to potentially work with me but before he can talk about his venture he wants me to sign a non-disclosure agreement.

7answers

I agree with the answers above of making sure that the NDA covers both sides well. Too many times have I had NDAs come across my desk that only cover the IP of one of the parties. It's not a huge thing (although definitely needs to be addressed), but I personally find it leaves a bad taste in my mouth about the company (specifically that they only have their own interests in mind).

Secondly, this goes without saying, but actually read the NDA. Some people / companies try to through some really nasty stuff in there. A few weeks ago I had an NDA poked under my nose which, other than being horribly one sided, had the following clause (paraphrased):
- The Recipient acknowledges that remedies at law may be inadequate to protect [The Company] against any actual or *threatened* breach of this Agreement by the Recipient [...]
- [...] the Recipient agrees that [The Company] may seek injunctive or other equitable relief in [The Company’s] favor, *without proof of actual damages*.

Maybe this is common, but it's the first time I'd seen a clause in an NDA like this.

It also depends on the terms of the NDA, but there is typically a clause stating that any IP developed prior and independently will naturally remain that of the party which developed it. The only caveat being that you need to be able to:
a) Prove that the IP truly was developed independently prior to signing the NDA
b) Be able to support your position (from a financial perspective) in the worst case scenario of you being accused of violating the agreement (which for a start up with limited cash can be pretty catastrophic).

I realise it isn't a 'yes sign the NDA' or 'no don't ever sign an NDA' answer, but I hope that gives a bit of useful information and points to look out for.

Also as a side note, what would be the potential upside of working with another entrepreneur? I'd start with a bit of due diligence on him/her before pursuing the NDA further (might turn out that they are horrible to work with, or not...).


Answered 5 years ago

Non-disclosure agreements are very common. Know that a non-disclosure agreement goes both ways as well. A contract agreement should also protects you from the other party disclosing any trade secrets or know-hows that they may learn from working with you.


Answered 5 years ago

Most established entrepreneurs aren't fond of signing NDA's because they can be too open worded and may prevent the entrepreneur from developing ideas and businesses off the fringe of the idea/trade secrets covered within the NDA. I certainly wouldn't sign an NDA unless there was an extremely compelling reason to. I would also be inclined to make sure the NDA was applied equally to both parties involved, and was very specific as to scope.


Answered 5 years ago

+1 for what Chris said. I usually wait to sign NDAs until very late in the process because most deals fall through and NDAs can limit one's freedom to act on ideas you had BEFORE you even met Mr. So-and-So. For example, if I later tell a programmer to start working on an app idea from two years ago, then a particularly litigious company could claim that I had wrongfully disclosed some of their ideas. So when someone asks you to sign an NDA in the first or second conversation, politely decline and offer the reasoning above. Say that you'd like to get to know the person better before signing anything. Say you'll be happy to answer specific questions about your experience and expertise. Say that you don't mean to be a stick in the mud, but you've found that two potential partners can have a meaningful discussion about partnership without inking paper. Over the past several years I've learned several things: 1) the people fondest of NDAs are the people least likely to act on their ideas; 2) as often as not, the person asking you to sign one really just wants free consulting; and 3) experienced businesspeople know that ideas are worthless without execution. Thus, they're typically not worried about divulging a few of their secrets because they know that 99% of listeners will do nothing with the information. The last thing I'll say is this: the bigger the promises, the harder the fall. So perhaps find a way to collaborate on a few smaller tasks or projects before hopping into business bed together.

Hope this helps,
Austin


Answered 5 years ago

Lots of good input here already. I concur with most of it. Make sure the NDA offers mutual protection and provides for a remedy that is reasonable. I would also suggest adding 'non-circumvention' language.


Answered 5 years ago

Just my thoughts...
I have been involved in entrepreneurial endeavors for many years and HATE NDA's. While I understand the importance, most people want you to sign them because they think they have the next best thing! Truth is, I keep my secrets close and will not share them with anyone that I don't trust or only trust if they sign an NDA. NDA's are important in longer term contracts and when working deep in the daily operations of the organization of which whom you are working with, and NEED to protect both parties. That said, they are only as strong as your pockets are deep when it comes to legal standing and there should be a level of trust established prior to sharing information that may be detrimental if in the wrong hands.

I will sign NDA's if it is a requirement in doing business and feel the relationship requires one, however, if it does, I really search my gut as to if it is a relationship that I want to be in long term and if what I am signing is two sided and would we both feel fine moving forward without one.

I have purchased businesses on handshakes and feel you really need to trust your gut and work with people you can trust.

Again, just my thoughts.
-Branden


Answered 5 years ago

I personally am very hesitant to sign non-disclosure agreements especially with those in the same industry AND new to my circles. Just my opinion, but the thing about ideas is that they are essentially worthless without the execution. No matter how 'great' or 'innovative' one might think their idea may be, entrepreneurs are usually too busy working on their own 'great' or 'innovative' idea to replace it with another. If the other person is not willing to risk some sort trust level of information then maybe you are better off moving on. If you feel the upside outweighs the downside such as you already have an established relationship with this party/ have validated this lead/feel you want to explore more, make sure the NDA goes both ways.


Answered 5 years ago

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