Yesterday I spoke with an entrepreneur during open office hours who asked me to sign an NDA. I said no. I always say no when someone asks me to sign and NDA to have a discussion. We had a long chat about this and a very good discussion. I thought it would help others to hear my answer to the question: When Is An NDA Right?
Let’s start with his situation. He reached out because he was looking for help hiring a programmer to build his app idea that friends said was a good idea. In human terms, asking someone you have never met and who you may never work with to sign an NDA is like asking them to take a criminal background check on the spot. It isn’t a good way to start things off. In fact, it makes you look amateur hour because it is simply akward.
In his case, he is someone who might have gone to a meetup asking for people to work for him without any prior knowledge of what he wants to do. This is a bad way to start off for him because he wasn’t selling himself, his idea, or really anything. In a world where everyone wanted to code for entry level wages or sweat equity this might work, but that isn’t the world we live in.
There are far more people with app ideas looking for help from coders who will build their apps than there are people out there who are coders looking to work for little reward for their hard work, or no reward which is the outcome if the app fails like the vast majority do.
So I suggested that he not let his NDA request get in the way and focus on selling the notion of why people should work with him on this idea. This should make things easier.
You are probably wondering what an NDA is for if it isn’t to protect your brilliant idea that will mint money. Let’s get down to that now. First, a disclaimer, I am not an attorney and I do not provide legal advice. I’m an entrepreneur who has hired a lot of people and built several profitable companies. I have advised dozens of companies that have been through successful exits and worked for a few of them along the way. You should talk to an attorney about how NDA’s work and how to use them. I’m only going to discuss the use case here.
Imagine that you are Larry Page and Sergey Brin. You have an idea for a search engine. If you ask people who you want to hire to work on your search engine app idea to sign an NDA up front they are going to think you are crazy or difficult or just plain amateur hour like I mentioned above.
Why is that? It isn’t that hard to build a search engine. You need to be capable of installing Elastic Search, Solr, Lucene or one of numerous other search products that are available for free. A few extra things are required such as a server, a domain name and a relatively simple user interface that just about anyone could build.
If you tell someone you want to build a search engine, and provide some details about why you want to do it and how you are really passionate about the idea then you will come across as authentic. This is especially true if you have done some research and have ideally created a search engine already. For example: a search engine could be stood up to search a folder on a computer, it doesn’t have to be competitive with Google.com.
The person you are asking to work for you or with you or to be a co-founder (ideally someone you know and have already worked on some project with) can now have a conversation with you and get to know you better. They can decide if they like you and like what you are talking about doing and work with you.
At this point you really should do some sort of small project together to see if you can work together and to make sure that this person you have met can do what they say they can do. Non-technical founders should either get their hands dirty and learn to do some coding themselves (see the Learn to Code section here on SocialMatchbox.com) or already have a technical advisor who can help with assessing this person’s capabilities and making sure that the app idea is soundly planned, architected and executed on from the get go. No need to disclose the secret sauce at this point, just the general idea.
At the point when you decide that you want to hire or work with this person, you should get some basic help from an attorney familiar with early stage ventures. This should be someone from where you are because even if you want to be a Delaware company you are going to be operating in another state (unless you live or will be doing the work in Delaware). This is important because it will make it much easier for you and your employee or sweat equity collaborator or co-founder to properly work out who owns what and what happens if there is a disagreement, etc.
Part of what you will get help from your attorney with is setting up the NDA aspects of the work and the intellectual property conditions for once work begins. No secret sauce has been revealed at this point and none should be. Your potential hire or collaborator or co-founder knows what they are signing up for. Your attorney can also tell you about the differences between things like trade secrets or copyright or patents (including provisional patents). An IP attorney may also be necessary if you decide that you want to pursue patents.
Once you get yourself set up properly, and remember that every case is different so if you hire a lawyer or don’t or do things one way or the other that doesn’t mean game over. It just means that you may have extra costs, liabilities or problems later. For example: I had a friend who split equity 3 ways with two co-founders who both later quit. When they quit it was like he was painted into a corner and could not do anything but surrender. A startup lawyer or even an experienced founder could have suggested vesting and saved his startup.
So now you have things set up. Your prospective hire accepts your job or becomes a co-founder. You know what to do to protect your idea from having gotten some appropriate legal advice (i.e. you did not download a doc from doc stock or download a stock legal doc for startups from some Accelerator’s website that isn’t specific to where you are operating (or that was written by an attorney who isn’t right for your state or situation)). NOW you start filling in this person on the secret sauce.
Let’s revisit the example of Larry and Sergey. Their search engine’s secret sauce involved a few hacks. For starters, they used a cork board server built with off the shelf computer parts that doubled the number of servers in a server rack while providing a crazy big increase in the server’s power. Next, they put multiple servers in a co-location facility space that they leased that hosted Google.com. The additional servers used more electricity and bandwidth, but at that time there was no additional charge for the additional usage in either case. Does this still sound like a search engine? It is sure does, but Larry and Sergey had some tricks up their sleeve that they needed to protect. They also had some special algorithms. The server, the way they implemented it, and the algorithms are the stuff that NDA’s and trade secrets are intended for.
But that isn’t the end of the story. Did you know that most really successful startups begin with one idea, but kick out of it and pivot or move on to a completely different idea? For example: Twitter is the by-product of a video blogging platform called Odeo. Invite Media, a company in the display advertising space sold to Google for $70 million, was the fourth idea that the founding team worked on together. Netscape’s founders originally thought they were going to work on a gaming company.
It really is about the team. Your idea may be a good one or a dud, but if you have the right team and you are all motivated the odds are much greater.
Today, and possibly back then, everyone signs a generic NDA when they visit the Google campus. Who knows if that is even enforceable. But the important thing is that you get going and if you put NDA’s in front of selling you and your basic idea then you are going to make it harder to succeed from the very beginning. And most importantly, you might miss out on an amazing team member.