Confidentiality and NDAs

Confidentiality and NDAs

So you have an idea for a startup. Even better, you have started coding it and making business plans, strategy and so on.

You want to get an investor on board, or your next hire – how do you protect your idea while still sharing it? How do you do that?

The short answer is, you have options, and you need to match the level of confidentiality with the situation.

The most common question about this topic is “why do the VC is not signing my NDA?”

It will be very difficult for any investor to sign something that most likely will expose them to potential risk. Because investors see many business plans, and meet many founders – they will unwittingly see similar play.

Now, they can by mistake say something about what they saw in your plan, in a meeting with a competitor. It could be something as innocent as asking your competitor “do you have plans to also develop X?”

If you showed them X, and the investor simply wants to asses who is further along on their development, they may now give he idea of X to someone else. And you may come back and say – you revealed my “secret”.

Beyond investors, you still need to recruit employees, work with vendors and need to develop your ability to share, just the right amount of info, on a need to know basis.

Say that you developed the next Google (theirs search engine). You want to raise seed funding and recruit your founding team. What can you tell them without an NDA and what must require an NDA?

An NDA is a Non Disclosure Agreement, which has a brother called an MNDA a mutual NDA. The are very common documents that provide an umbrella for discussions in confidence about the subject hand.

Your new startup has layers of confidentiality, so you should not think about in a binary fashion. For the Google example, here are four levels of disclosure you can have:

  1. I invented a new search engine – no need for NDA
  2. I invented a new search engine that uses people’s emotions as feedback to the search result – no need for NDA
  3. I am using AI and ML together with technologies that calculate the user’s emotions to feed my algorithm – no need for NDA
  4. How exactly you do it, your algorithm/code, your research results, your insights, who worked on this project… that is NOT needed to describe your startup unless there is a NEED.

If you go to a VC or investor that ONLY invests in real estate projects, they will stop you when you say that your idea is about a new search engine.

Think about your startup as a pyramid, with layers of security. You can reveal some layers and not all, and keep it relevant to the discussion.

Another metaphor you can use is a butterfly cupped in your palms. You say to the investor that you have a butterfly between your hands, and if you open the hands completely – it will fly. So you can open a crack and show that you have something, and its colors, and that its moving…

You do not have to let it all go, especially if you are not ready to do so.

At the same time, the more information you keep confidential, the less likely you are to get an investment and/or to recruit help. Why? because people are making a decision based on what you tell them and not based on direct experience. You need to balance your needs and the other side’s needs to get things done.

In some cases, an investor who really wants to invest in your company, would NEED to know more, for fiduciary reasons. They need to see your documents of incorporation and not just trust you have them etc. At that point they may sign an NDA. After you secure an investment, there is little risk of sharing your secrets, as the investor and your team will be incentivized to keep things under wraps.

All this to say that you should get used to sharing, smartly, on a need to know basis, and compartmentalize the information.

It is not wise, nor a good strategy to tell people “I can tell you, but I will have to kill you…” That works only in the movies.

References and quotes:

“A secret that two will know, two hundred will know.” – Arabic Proverb