The Strong Arm of Contract Law or Why Non-Disclosure Agreements Still Matter!

The world of non-disclosure agreements: better legally safe than bitterly sorry

Hello, nice people! It is great to be back in the blogging saddle again! As usual, I have prepared an interesting topic and I am really excited to share it with you. Yet, this time, I am not going to discuss marketing tips or tricks that I have mastered. Instead, I will go totally legal and I will be discussing the power of ideas, how to protect this intellectual capital, and how to ensure it does not get in the wrong hands. Hence, I will open the can of worms and bring the concept of non-disclosure agreements to the table. This time, however, I am going to stand up to marketing gurus such as Guy Kawasaki and argue that some of the pieces of advice that they have been so kindly giving away are literally out of touch with reality. Moreover, their tips to fledgling entrepreneurs somehow contradict good business practices and business ethics. Yet, this is just the mere beginning. If you want to find out why non-disclosure agreements matter more than ever, simply read on!

A few weeks ago, I came across an outdated article, written by Brad Feld in 2006. This piece contained a quote from Guy Kawasaki, who argues in his Venture Capitalist Wishlist article that you should never ask a venture capitalist to sign a non-disclosure agreement (NDA). Indeed, “If you even ask them to sign one, you might as well tattoo "I’m clueless!” on your forehead" assured us Mr. Kawasaki. Mr. Feld further elaborated on this statement, by adding a few extra points as to why you should not even dare ask a VC to sign an NDA. Moreover, if you have the audacity to insist on signing one, the almighty investors might show you the door. Whereas those statements were made in 2006 and a lot of water has passed under the bridge since then, the discussion about the significance of non-disclosure agreements still rages on.

We live in times when information has become the main currency of all business transactions and the world is powered and run by great ideas. Moreover, great ideas, which have a solid value proposition, are worth the value of the person who came up with them in gold. Or even more. Just for the record, the concepts behind awesome products and services do not have to be highly original or creative. They just need to be practical and they have to contain a fiery value-added core. As long as they fill a real or a perceived need and they solve problems that people are experiencing, you can rest assured that you have come across a potential gold mine and you have to start digging deeper. If you have the necessary resources and you do not depend on anyone, you can start developing. If, however, you happen to be strapped for cash but you still want to turn your idea into dazzling reality, you have to approach an angel investor and hope and pray that he or she sees the same potential in your concept as you do. At this stage, however, things can go horribly wrong if you do not take the necessary measures to protect your ideas. Sadly, we live in a world where dignity, ethics, and good business practices might mean nothing to some people. At the end of the day, it all boils down to cashing in first and cashing in big! In case you get yourself in a situation in which you see your idea blatantly used or stolen by someone who initially seemed like a benevolent patron, you need to rely on some kind of legal defense that can be enforced in a court of law. Otherwise, you might just end up dead in the water. Although this scenario might seem quite improbable, as it is enveloped in the mists of paranoia and enshrouded in the myths of personal greatness, it is not implausible. Hence, I will dedicate the rest of this article to dissecting the arguments of Mr. Kawasaki and Mr. Feld and I will attempt to prove that their statements are out of touch with reality. In any case, do not go ballistic. After all, this is just the opinion of somebody who has a legal background and has been trained to think like a lawyer.

We have all seen the Social Network movie. Or at least we have all heard of it. Whereas, there might be an intense interchange between reality and fiction, we all witnessed how somebody who had the resources and the know-how could transform a presumably contract job into his own shortcut to greatness. The legal controversy surrounding the real life Facebook case ended with a proverbial out of court settlement. Of course, as it always works with out of court settlements, there was no verdict, the truth was buried, and there were no guilty sides. Yet, somebody was $20 million richer after that. The moral of this convoluted story is that legal defenses do offer some sort of insurance in case something goes totally wrong. Think about it next time you are about to share your ideas or reveal your plans for market domination with a contractor or an angel investor. A simple signature could nip all the trouble in the bud! Indeed, if I have to paraphrase Guy Kawasaki here, if you do not sign a non-disclosure agreement, you might as well tattoo “I’m stoopid” on your forehead.

Better Legally Safe than Bitterly Sorry

So, how much is your idea worth? Does it have the ‘win’ factor? How hard have you worked on it? How far are you willing to go to make it happen? How far are you going to go to protect it and claim what is rightfully yours? Those are just some of the questions you need to ask yourself before you approach a venture capitalist or an angel investor. Indeed, let’s keep the following premise in mind: whereas entrepreneurs are short of money and/or resources, VCs are short of ideas. Both of them are in for a win. Hence, there is a symbiotic relationship between those two species and a co-existence, governed by the rule of law is perfectly feasible. Indeed, Mr. Feld needs to come up with better arguments than those pertaining to the need to read a non-disclosure agreement or ask a lawyer to go over it. Reading a standard 2-3-page NDA and identifying possible legal problems takes no more than 20 minutes. At least, this is how much it takes a professional lawyer or a seasoned VC. I understand his concerns about legal fees, but you simply cannot have everything for free in this life. At the end of the day, you have to give in order to get and reciprocity is implied. In addition, VCs can prepare a standard copy of a NDA and this can save them a lot of recurring legal expenses. Then, they can give it to the entrepreneurs who apply for sponsorship and grants and most of the people would be more than happy to sign it. Thus, eventual objections with respect to certain clauses pertaining to the NDA can be solved in no time. In addition, keeping track of your documents has never been so easy! There are tons of project management tools, free tracking tools, and millions of applications that can help you with that. Hence, VCs and angel investors have no real excuse. The solution to their tracking problems is just a click away.

It is imperative that you understand that NDAs can be enforced in a court of law. It is up to you to pursue their eventual enforcement by filing a case in the respective court of law as indicated in the NDA and agreed on by both parties. The very fact that some of us do not have the time, the determination to stand our ground, the nerve, or the resources to file a case and defend what is rightfully ours does not mean that an NDA cannot be enforced. At the end of the day, an NDA is nothing more but a contract and as the bedrock principle of contract law stipulates, Pacta Sunt Servanda or agreements must be kept. In fact, contract lawyers deal with such cases on a daily basis and people who win their law suits because they are perspicacious enough to sign NDAs do not consider them a waste of paper! On the contrary, they are the safety net that guarantees that in case of foul play, there will be legal consequences. In that context, if a potential relationship is not regulated by law and if you believe that an insider or a person entrusted with confidential information has infringed your intellectual property rights, there is little you can do about it. You just do not have any legal resources. Oral contracts have the force of written contracts at least here, in Europe, but still, it is strongly recommended that you be in possession of pieces of physical evidence that someone agreed to do so and so, not to use your idea (the so called non-compete clause), and not to disclose or use this and that. If you do not have any of those, I am sorry. GAME OVER. After all, you opted out and you agreed to play with fire. Now you got burnt. Better luck next time and do not forget to sign a NDA!

The Value of NDAs

An NDA is the DNA of a transparent business relationship. From the very onset, both the entrepreneurs and the investors get off on the the right foot. Moreover, signing a non-disclosure agreement is a demonstration of professionalism, due diligence, good business practices and ethics, and most importantly, it is a legal expression of faith and honesty. Indeed, if a VC objects strongly to signing a NDA for the aforementioned reasons, you can always look for another investor who is actually willing to treat you with some respect and assure that your intellectual property is in good hands. After all, investors compete for entrepreneurs and their ideas, so at the end of the day, it is their loss too, not just yours. Even if a business relationship never materializes and you do not get the sponsorship you’ve been dreaming of, you can rest assured that your idea enjoys a layer of legal protection and it will not be brutally stolen by some dishonest individual.

The last point I would like to discuss is the initial argument of Guy Kawasaki, who states that investors will not sign NDAs “because at any given moment, they are looking at three or four similar deals. They’re not about to create legal issues because they sign a NDA and then fund another, similar company – thereby making the paranoid entrepreneur believe the venture capitalist stole his idea.” This one is a tougher argument to crack, but jeez, what are the odds of this happening? Even if two or three companies have similar ideas, there would be significant differences in their approaches and their business concepts. In addition, if an idea is so very widespread, why should you even invest in it in the first place?!? In any case, you can always write a disclaimer note in the NDA and you can warn of a potential conflict of interests.

Before I rest my case and finish my tirade, I just need to refute one more assumption that Mr. Feld made. I personally tend to agree with Mr. Feld who claims that the value of a product or a service is in creating it, not just in having the idea. Whereas I concur with him on this one, we need to abstract ourselves from reality and plunge into that perfect state of utopia where we had the idea, the capital, and the manpower to create the next groundbreaking product and hence to attain ultimate value. Then Mr. Feld and other investors would be out of business. Indeed, if all entrepreneurs had the capital they required and they could develop their ideas themselves, we would not require NDAs, we would not be having this discussion, and VCs and investors would have to do something else for a living. Yet, there is no such entrepreneurial Heaven on Earth and the financial obstacles that get in the way of people with ideas are very real. Hence, the real value of a product or a service is an aggregate of multiple components, which include the efforts of fledgling entrepreneurs to come up with an idea, their attempts to secure a sponsor, their shot at developing it, their tries to market it, etc. At the end, each element is an integral part of the whole. A missing piece makes the whole incomplete and hence dysfunctional.

Thanks a lot for bearing with me. I know this article is quite controversial and I am quite critical to certain points made by Mr. Feld and Mr. Kawasaki. Yet, I simply cannot agree with their statements as they have no legal merit whatsoever and they seem to solidify the status quo and perpetuate the reign of some murky business practices that unfortunately, still abound in our world. I am open to any discussions and I am ready to give further clarifications as far as my stance is concerned. Just for the record, at Rock & Code, an NDA is the LAW. Join me next time, as I will return to my usual marketing activities and I will discuss the notion of being fast as a shark in business! Meanwhile, do not forget to follow us on Twitter, join us on Facebook, and subscribe to the feed that rocks! See ya all next week!