As a former attorney to entrepreneurs (tech & entertainment), I get asked about NDA’s and sharing ideas probably more than any other topic. When it comes to story ideas, it’s better not to share with “just anybody” because stories can be told very easily in more than one way. A story about a meteor crashing into Earth? Has been told numerous times in various ways to various degrees of success. But when it comes to business ideas, the same doesn’t hold true. Business ideas can’t be simply retold – there’s true function to a business that needs to be built, to be coaxed out of a market.
In my law practice (and to my wife’s chagrin), I have never advised a client about a certain legal strategy just because it made more paid work for my firm. So if a client asked about the necessity for an NDA, I could have said “Sure, that’s a really smart move, and I can draft one for you in a little less than an hour at the standard hourly rate.” But that was rarely the case because clients rarely actually needed an NDA for legal reasons – really all it served was to make themselves feel better about a conversation with someone they didn’t know. (If a client asked about an NDA for a discussion with someone they knew, then I’d tell them they were being a jerk and charge them for the phone time.)
So when is an NDA appropriate and when is it unnecessary? A connection of mine on LinkedIn posted a helpful image of “Invention vs. Innovation” (see insert below) that I think sums up the distinction very well. All you Interweb readers out there must understand that Invention is different than Innovation. If you have an Invention, then get an NDA from anyone you share it with in the period before you get a patent (emphasis on Getting a Patent). If your idea is not patentable, then you’re actually Innovating and don’t worry about an NDA. I’ll explain below.
WHEN TO NDA – INVENTION
Ideas that are patentable are granted a controlled monopoly over the idea for 17 years. That’s what a “patent” is at its essence – a government sanctioned monopoly. If you’re developing a new drug, or a new kind of power generation, or a new kind of radio, then you need a serious amount of time to get it right and bring it to market. Get an NDA in this kind of circumstance until you get your patent because 1) public disclosure of your invention starts the clock on your patent – you have 12 months from public disclosure to finish your patent application or lose it forever! and 2) you have 17 years if granted a patent, so take your time and build it right – an NDA (theoretically) gives you more time. Inventions take time.
Conversely, if you’re an established business with significant value at stake in a negotiation, you’re not inventing, but you ARE innovating. Get an NDA from the other party so that you can complete your deal in the best possible manner without worrying about conflicts of intention or interest. But this only applies to existing businesses with revenue to protect – this does not apply to startups.
WHEN NOT TO NDA – INNOVATION
If your idea is not patentable (you don’t have an invention) and you’re actually innovating in a field, by necessity you must move quickly because the market tends to move faster than you do. People are creative – if there’s a problem with an existing application, often they’ll find alternatives or iterations that get them around the roadblock. So to capitalize on your innovation, you need to move faster than the market in order to capture that value. If you have a business idea and think to yourself “I need an NDA to protect my secret sauce” then BY DEFAULT YOU’RE NOT MOVING FAST ENOUGH AND YOU’RE NOT READY TO SHARE THE IDEA. Move quickly, share wisely (not indiscriminately – i.e. don’t share it with an incubator team looking for a pivot), make sure people want the idea, build a team, build the solution, & get it to market quickly. You have a limited time frame in which to monetize your solution. There are a couple reasons why NDA’s don’t actually help you here:
- There’s a difference between Legal Risks and Business Risks
Lawyers -under professional obligation to clients- must err on the side of caution. Therefore, to lawyers, no risk is a good risk because their bar license and income are potentially on the line if a client takes a bad turn from the lawyer’s advice. However, in business, there is no such thing as “zero risk” so at some point, as a leader, you must make a business decision that certain risks are acceptable risks. Sometimes even against your lawyer’s advice. This is the nature of the business world. If you can’t stomach even a small amount of risk, get out of the tech or entertainment business and go into the insurance business – trust me, you’ll be happier overall (but a more miserable person to be around).
- The complexity of the recipe for a business means no one will execute an idea the way you would.
Presumably, you have some insights that extend beyond simply the idea at stake. You know the audience or the customer better. You know the strategic partnerships better. You know ways to connect the dots technologically that would take others months or years to discover. You know what the look and feel should be. You know the right pricing strategy. These are all moving targets that even you – the idea expert – will have to adjust as you go along. How likely is it that someone you mention the idea to will a) drop their own ideas in favor of yours, and then b) execute the idea the same as you or better? Get real. If they can do it better, then guess what – that was the wrong idea for you to bet your career on. Go back to the drawing board. No NDA will protect you from your own inability to execute the idea.
- Industry norms are for No NDA’s.
Don’t be that guy that thinks their idea is more important than the person’s integrity you’re sitting across from. Again, if you’re at the “can’t share because it’s too fragile” stage, then you’re not ready to start building it.
Being a good entrepreneur means taking risks as a leader, innovating faster than the market can move away from your ideas, rallying support for your idea – from an internal team and from an external customer base, and executing well. Don’t let paperwork stand in your way of a winning business.