Protecting Your 'Secret Sauce'
Last month, AllThingsD ran a story about Fatdoor founder Raj Abhyanker and his lawsuit against Benchmark Capital. The suit alleged in part that Abhyanker pitched a neighborhood site called Nextdoor to Benchmark in 2007, and that Benchmark stole the website name and then, via one its entrepreneurs-in-residence, ran with the business idea themselves.
Over the next few weeks, a handful of our clients who are involved in the fundraising process forwarded that article to me and asked if there was anything "special" they needed to do when talking to VCs. Some even asked for a form NDA that they could present to investors. Needless to say, I spent a lot of time on the phone educating and re-assuring these entrepreneurs.
Is it plausible that one of Fatdoor's potential investors stole Abhyanker's idea? Well, it's definitely not out of the realm of possibility. There are bad actors in the investment world. For instance, any experienced player in the start-up scene can tell you stories of VCs who have taken companies—in which they did not actually intend to invest—through the entire due-diligence process for purposes of gathering intel on one of the company's competitors.
In the end, however, stories like this should not alter your overall outlook on disclosing confidential information when pitching investors. My guidelines for dealing with these meetings have not changed. Here they are:
Put away the NDA.
Thinking of asking a venture capitalist—or other investor—to sign a non-disclosure agreement? They won't sign them. Ever. Asking them to sign one will make you look like a clueless rookie.
VCs and angels investors are looking at tons and tons of possible deals at any given time. A lot of those ideas could be very similar to yours. If investors had to evaluate, sign, and keep track of an NDA for every business plan, pitch deck, and executive summary that came their way, the investment process would turn into a burdensome nightmare and investor activity would screech to a halt. Investors won't sign NDAs. It is just a fact of life—deal with it!
Stop overestimating the legal implications.
The fact that an investor won't sign an NDA really should not bother you. NDAs are notoriously difficult to enforce. No one ever tries to enforce them unless they are literally willing to spend millions doing so (think Samsung, Adobe, etc.). It can be incredibly hard to prove unauthorized disclosure—and you also have to prove that you suffered monetary damages because of the disclosure. Trying to get an injunction if you can't prove monetary damages is even harder.
Be practical when revealing your secret sauce.
In the end, most experienced entrepreneurs will tell you that one cannot simply rely upon the provisions of an NDA. Instead, you need to take a calculated and measured approach when it comes to disclosure. Disclose only what needs to be disclosed to get your point across and hold onto "crown jewel" trade secrets whose disclosure will hurt the company.
Recognize that it is still all about execution.
Finally, be realistic about the real value and "uniqueness" of your idea. As someone who is constantly meeting with entrepreneurs and investors, I can tell you with a great deal of certainty that someone else is probably working on an idea that is remarkably similar to yours. The idea itself is such a small part of the equation. Startup success is still overwhelmingly a function of your team’s ability to execute—and proper execution more than likely requires the resources and time that outside investment can bring.