This is a series of Startup Myths. I’ve been hearing lots of people talk about starting their own businesses recently and would like to quell some of the misinformation that I’ve heard circulating.
You Need an NDA
The Myth: You need an NDA to protect your intellectual property. Some unscrupulous person could steal your idea and make millions of dollars from your hard work.
The Truth: A Non-Disclosure Agreement (NDA) can be a useful document. However, it’s designed in most cases to apply to employees. They should not be used with investors, co-founders, advisors, etc. There are a few reasons why this myth is complete bunk.
- VC’s won’t sign them.
If you take an NDA to any Venture Capitalist or serious Angel Investor… they will immediately stop taking you seriously. Why? Because it creates a huge liability for them. Imagine, if you will, that I’m an angel investor. You come to me with an idea for a mobile app that does XYZ. I sign an NDA. Then maybe I talk to Brad Feld and during the course of our conversation he asks if I’d be interested in partnering with Foundry Group to invest in a mobile app that does XYY, which is similar, though not identical to your app. I decide to pass on your app and invest alongside Foundry. You hit me with a lawsuit claiming that I stole your idea and passed it along and am now profiting from your idea. To quote Guy Kawasaki: ”If you even ask them to sign one, you might as well tattoo “I’m clueless!” on your forehead.” So you might as well burn the thing. If you think I’m just blowing smoke here, here’s three more example from VC’s and Angel Investors such as Anil Dash, Fred Wilson, and Andrew Warner. In fact, the thing that will whet more investor appetites is telling them why you’re going to succeed… what differentiates you from your competition. I’m not saying you should feel free to post your b-plan on your website, but don’t treat your idea like the Holy freaking Grail. - Your idea is worthless. This has been repeated ad infinitum, but apparently it needs to be said again. The success of any business is in the execution. The best post I’ve seen on this is from Paul Graham, founder of YCombinator. Example: Woot and Groupon. Same basic business model (with some tweaks), but vastly different execution. So you have an idea for a deal-a-day website? Big deal. What makes Woot successful? The personality of the company. You can’t really copy that. There are a number of things (flying monkeys with Woot capes, bags o’ crap, Wootoff lights, etc.) that all add up to differentiation. And if you’re just doing a copy and paste business (meatballs
) then there’s no reason to protect that idea either.
The bottom line is that an NDA can provide you with valuable protection. But you need to make sure that you use it wisely. Do your research and see if the investor you’re pitching has written about them. If in doubt, then don’t ask them to. If your idea is really that good, use it to hook them in. If it’s not, maybe you shouldn’t be talking to an investor in the first place.
