Is it better to Disclose without an NDA or with an NDA?

19 08 2010

Earlier this week I was reminded that I differ from a lot of others in my approach to this question…  I had a dinner with a number of other very savvy technophiles, including Robert Scoble.  At this dinner the question of whether a new startup with an interesting idea, but not a particularly difficult development challenge was better off disclosing to VC’s and other technophiles without an NDA so that they could help in whatever way they saw fit or file patents (provisionals) and get an NDA in place prior to disclosing.

In some ways this question will probably be debated for some time.  On the side of disclosing without an NDA the argument goes something like this…  “I can only help you if I know what you need help with, and I am not interested in stealing your idea anyway” because technology is moving so fast that it will be obsolete soon.  There was a follow up comment that, “Provisional patents mean nothing to VCs”.  On the side of not disclosing the argument goes something like this, “I want to share with you what I am working on, but I want to be prepared in the case that you want to help me by protecting my interests first, both in the ideas implementation (provisional patent) and in preventing the idea from being shared (NDA).

Bottom line, this is a tough call.  NDA’s are difficult to enforce, that is common knowledge, and I still believe in the value of provisional patents – even though I also believe that the patent system is deeply flawed, designed to address a market that has changed dramatically, and therefore not living up to the expectations of the originators of the system.  However, after questioning if I was a dinosaur, I still come down on the side of “get your house in order” prior to talking to potential investors, largely because I believe that the valuation of the startup – which is the basis for all investments, even early ones – will be dramatically different if there are actual assets involved.  Those assets are the patents (provisional or not).  Of course, issued patents on the idea are much more valuable, but based on 4-5 year examination cycles (another abomination in the existing system) waiting for issuance is not something that a lot of startups can sustain.

What do you think?

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2 responses

19 08 2010
Martin Suter

Michael;

You raise a valid question here. As you suggest, both sides can make a compelling case.

In my experience, most VCs are loathe to sign NDAs, making the question moot, from a fundraising perspective, at least in the early stage of discussions. By the same token, however, it is unlikely that a VC will require a level of disclosure at the courting stage that would jeopardize a future patent challenge. Once the initial vetting is out of the way, the team is blessed, the market opportunity identified and quantified, and the competitive landscape understood, then a deeper level of technical disclosure is likely required, at which point it is reasonable to expect a VC to sign an NDA as a good faith gesture.

The question of when and what to disclose to strategics is a whole other discussion! Maybe your next blog?

That’s my .02!

Martin Suter

7 09 2010
To be Stealth or not to be Stealth with your Startup | Ramblings of a Web Startup in Progress . . .

[…] I also realized (almost embarrassingly at times) that the whole NDA thing is controversial as well. Some people have told me that “real” entrepreneurs don’t use them, some people have been fine signing them. I just keep chugging along, having people sign them that I disclose data around the secret sauce to my site. I’m ok with that, and my attorney is peachy that I have people sign and NDA, even though many in the techpreneur universe find them laughable. There’s a great post over here on “Is it better to disclose without an NDA or with an NDA” […]

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