3 Reasons You Can't Trust Non-Disclosure Agreements

By Mujir A. Muneeruddin

Many in the tech space have been there. You've got an (amazingly awesome) idea, but you need help building on it. So you hunt around for strategic alliances that fit the bill. Eventually, you come to that uneasy fork in the road: the point where you need to share your secrets to have any meaningful discussion with a potential ally. You're now in the NDA Stage.

An NDA, or Non-Disclosure Agreement, is a promise by one or more parties to not divulge certain sensitive information to anybody except in accordance with its terms. While an NDA definitely is essential, few realize its limitations. Granted, NDAs are very standard and commonplace, but that isn't necessarily because they're so good at insulating ideas; NDAs are popular because they're all that people really have in a very vulnerable situation. In practice, a lot more goes into protecting your secrets than simply signing a 3 to 4 page document. Here are three basic reasons you cannot substitute an NDA for prudent judgment and good strategy:

Limitations

1. Proof and Traceability

The first major limitation of an NDA is the near impossibility of tracing the chain-of-custody of leaked information -- and then proving it. For example, if your devious former developer discloses your idea to his friend who is in town from San Francisco, and that friend goes back and successfully founds a competing startup that stuffs your growth, you might never find out. Even if you do find out, it's not likely that you're going to be privy to documentary proof of the disclosure and the fact that the friend knew such was in breach of an NDA. However, in the interests of making a point, let's say that you do have proof that your ex-developer passed information to his friend. Unfortunately, you still . . .

2. Need to Enforce

A breach of an NDA simply gives you a chose in action, which generally means the right to sue. In other words, no government agency is going to go after anyone for breach of your NDA. Hence, if you want to go after your ex-developer, you're going to have to sue him and likely have to hire a lawyer. During litigation, the ex-developer will have a number of defenses available, such as (for example) the argument that the NDA is invalid/unenforceable, or that the sensitive information was already in the public domain (and thus not leaked through any fault of his). Regardless of how weak his argument may be, the matter will (with few exceptions) have to run its course through the entire trial process, which can take years depending on how backlogged the court system is. Even if you win, he could be granted the right to appeal, dragging it on even further. You and your counsel will also need to come up with a figure that shows how much money you "lost," or would have made, if not for the ex-developers breach. Obviously, this involves a lot of "what-ifs" and "could-haves," all of which require a degree of convincing. If you are an early-stage startup with little or no revenue on which to base your claim, this can obviously become a tougher sell.

Most importantly, your ex-developer may not be worth suing. Chances are, he's relatively young and fresh out of school, maybe even with some student debt. Good luck ever recovering your losses.

So why not go after your ex-developer's now deep-pocketed (as a result of your idea) friend? Well, if he's based in the Valley, you run into issues of . . .

3. Jurisdiction

In order to bring an action against someone, you generally (depending on jurisdiction) have to sue them where they have some type of connection (i.e., where they either live, operate their business, or have property). In the case of your ex-developer's friend, that likely means bringing a lawsuit in California. You will have to hire local attorneys and be entirely subject to the law of the land as it relates to NDAs, which can vary from one jurisdiction to another. In the case of California, you would have a generally pro-defendant system on NDA matters stacked against you. If litigation is indeed "the sport of kings" as some call it, chances are there are more pressing uses for your startup's precious capital. And if you will not be embarking on costly long-distance litigation against some guy in California, you've ended up leaving your business at a competitive disadvantage from day one.

Solutions

The point of the above is not to paint a picture of doom and gloom, but rather to show that an NDA is a minimal tool in protecting your information. In fact, one might argue that an NDA's only true value is as a psychological deterrent (due to the threat of litigation, which no one likes) to disclosing information. However, sophisticated swindlers are usually aware of the limitations and will take advantage if you share information you don't need to. So what to do?

1. Treat the NDA as a Bare Minimum and Cover all Bases

This may seem obvious, but only share information on a need-to-know basis. When dealing with a potential ally, there are typically very generic ways you can describe your business (without giving too much away), before getting a sense of how serious the other party is. In other words, try to put off the NDA Stage until you are sure the ally is not only serious, but will bring significant value. Once at the NDA Stage, make sure your form of NDA stipulates that either information cannot be passed without your consent or can only pass to someone who also signs an NDA. This increases the chance that the other side will not be cavalier with your information by at least showing that you're serious. Also, try and negotiate for the term of the NDA to be indefinite. As a mentor once told me, "The secret sauce always remains the secret sauce." I'm usually even less inclined to put a term on NDAs in the tech space, where information and secrets are everything. However, this will often come down to the relative bargaining power of the parties.

2. Think About Whom You Are Sharing Information With

Think about the position of the person you are sharing information with and how their interests line up in the long term. Are they a potential competitor who can benefit from getting a closer look at your business (even without breaching the NDA)? Or rather, are they a potential supplier who has an interest in working with you in the long run? The latter clearly has a lot more reason to do good by you (i.e., protect your sensitive information and help keep a potential customer alive and well). This is certainly not to say that you should only divulge information to potential suppliers and never to potential competitors, but always keep relative interests in mind.

3. Treat Disclosure as an Investment

Disclosure is an irreversible investment, so always have a clear sense of what you are getting in return. For example (to build on the previous point), before investing disclosure in a prospective employee, try and see where they will be in the near future. Are they a temporary exchange student who might just be looking for a notch on their résumé before heading back overseas upon graduation? Or are they a professional with ties to the local tech scene and thus have "a lot to lose" in terms of reputation here? In the former scenario, the student is less likely to keep information confidential for a number of reasons. For one, not yet being a professional in the workforce, they may not yet appreciate the ethical and practical implications (on their future prospects) of breaching an NDA. These implications include losing out on an opportunity to help build something, which especially means nothing to them if they are leaving the country. On the other hand, the latter may be more expensive, but they are more likely to feel a sense of ownership and thus show greater discretion, giving you better return-on-disclosure – or at least help you avoid a disastrous loss – in the long run. We had a similar dilemma in a startup that I cofounded, where the two alternatives were tens of thousands of dollars apart in annual salary cost. It was a difficult decision to make, but to me, there was no point saving money if the company would be severely threatened a year or two down the road. Fortunately, the rest of the board agreed.

Summary

While an NDA is an important tool to help protect your secrets, don't think of it as a moat of lava around your castle. The best defense of your secrets, in addition to a well-drafted NDA, is the exercise of prudence and discretion before divulging anything.