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Peter Cochrane's Blog: NDAs are worthless
Start-ups and entrepreneurs may want them but VCs won't sign

By Peter Cochrane

Published: Wednesday 22 February 2006

Written and edited on the 17:30(GMT) train from London Liverpool Street to Ipswich and dispatched from a free wi-fi site in Ipswich.

In my role as a business angel and VC, I have become increasingly sceptical about the purpose and validity of Non-Disclosure Agreements (NDAs) to the point where I will no longer sign them. In fact I can no longer find anyone in the tech and innovation game that will. How come?

On the face of it an NDA protects the ideas of the individual and group from plagiarism and exploitation. At the same time it clearly defines and demarks the scope for parties who may wish to enter into a serious commercial relationship to legitimately exploit the marketplace. But such is the pace of technology, change and the generation of ideas that NDAs have become degraded and useless through the following mechanisms:

1. When someone approaches an angel or VC for money, or a guru for advice, it is unlikely that the ideas and technologies discussed are wholly novel new. Most likely the angel/VC/guru has already seen something similar, and if they haven't they soon will! So why sign an NDA and risk creating a legal mess later?

2. Ideas and technologies are like cabs on a summer's day - there are plenty, and there is always another one coming! Moreover, they are all blessed with a similar likelihood of failure or success, and from an investment point of view, choosing the real winners never seems to be related to the adoption of an NDA or no.

3. Even worse - every NDA is different and demands a lot of reading time, and even more time with the lawyers! This adds a lot of wasted time and a lot of wasted money, so the whole process is uneconomic at every level.

4. NDAs are always in a paper format and need storage space - they have to be filed, recoded and tracked. No thanks!

5. I cannot remember a single occasion when an NDA was used in anger. What a waste!

6. The angel/VC/guru has the power of negotiation, the upper hand - ie the money and knowledge. He who holds all the cards wins!

7. The longevity of ideas and technologies is now so short, the NDA concept has become inherently ineffective in protecting anything or anyone.

Sometimes large companies insist on an NDA being signed when they have a pre-launch embargo on a product or demonstration. Here the NDA is usually very specific and very short-lived, and therefore much less of a problem. But most people can be trusted to stay 'mum' anyway, so why bother?

And the upshot of all this for start-ups? Only deal with good people, ie those with a good track record and/or those you know. Also, only reveal that part of the idea/technology that wins the deal. You seldom have to tell everything in minute detail. Remember, trust is what people do when they don't know any better.