04/30/2014 02:46 pm ET Updated Jun 30, 2014

NDAs Are Stupid (Mostly)

A few weeks ago, I asked our System Operation Manager to get a quote from a new service provider. To get a quote, we would need to provide some basic information about our server configuration, and the service provider would give us pricing. But rather than a simple conversation, the vendor decided that we had to sign an NDA (non-disclosure agreement) before they shared any information. You know, for our mutual protection. What a joke.

NDAs are stupid (mostly). The basic idea behind one is that it's a formal legal agreement that states I won't share your secrets and you won't share mine. But how many secrets does a company really need to protect? And what's the consequence if those secrets are shared? Most importantly, how do we enforce the NDA if the secrets are shared? An NDA is only really useful as a legal document in the case that the parties end up in court. And if you end up in court, it's going to be expensive -- VERY, expensive.

NDAs are only useful if the secrets disclosed would have a detrimental impact on one of the parties involved. If we are sharing proprietary data or we're divulging top-to-bottom financial information that would harm us if leaked, then we can do the NDA dance. If we're simply providing basic information to each other, then there is no use for a piece of paper that is only useful in a court of law. I have a stack of signed agreements from companies that insisted on an NDA before we can have a meaningful conversation. By requiring an NDA, these companies put up an unnecessary roadblock that slowed innovation. They are mired in paperwork for a false sense of security.

One of the more bonehead uses of an NDA are by entrepreneurs who try to get an investor to sign an NDA before sharing their idea. It's a sure sign of a newbie if you ask an investor to sign an NDA. When an entrepreneur approaches an investor for money, it is unlikely that the ideas and technologies discussed are absolutely novel. Most likely the investor has already seen something similar, and if they haven't they soon will. If an entrepreneur is really concerned about someone "stealing" the idea, then the idea probably isn't that good. A successful startup is all about execution, not novelty. Case in point: how many social networks existed before Facebook came along? Mark Zuckerberg and friends simply out-executed everyone else.

So in what scenarios does it make sense to sign an NDA?

  • If we are sharing specific financial data with each other that would harm the company if shared. For example, if I'm going to disclose revenue, expenses, profits, margins and I don't want my competitors to have this information, then I probably will want you to sign an NDA.
  • If we are going to show each other proprietary technology that is not yet commercially available, then we should probably sign an NDA.
  • If we are engaged in partnership discussions that will have a material impact to either of our businesses, then we should probably sign an NDA.
  • If we are deeply engaged in merger and acquisition discussions, then we should probably sign an NDA. Neither party would want that information leaked, and the addition of an NDA demonstrates the seriousness of the parties.

If you sent me an NDA to sign, there better be a very compelling reason that we need to sign it. Are we sharing proprietary information that could harm both of our businesses? Would we actually sue each other if the information gets leaked? If not, let's skip the NDA and focus on building a mutually beneficial relationship. We don't need a piece of paper to prove that we'll respect and trust each other.