A recent episode of “Silicon Valley” was brought to you by the letters N-D-A. The protagonists are seeking funding for their start-up, Pied Piper, and one of the potential investment groups starts asking curiously technical questions regarding how Pied Piper’s algorithm works. Pied Piper’s developers are so flattered that somebody finally appreciates their genius that they fail to recognize that the investors aren’t conducting due diligence, the investors are trying to steal Pied Piper’s intellectual property.
Beware of TMI; don’t overshare without the protection of a nondisclosure agreement. Nobody expects an investor to take a meeting, much less invest, without understanding the general nature of your start up. But start-ups are often so hungry for investors that they provide too many details of their product or service, their business plans or other proprietary information without the protection of an NDA.
Under the Uniform Trade Secrets Act, there are two prongs to a trade secret:
- the information must provide the owner with independent economic value by not being generally known to the public or those in the relevant industry; and
- the owner must have taken reasonable efforts to keep the information secret.
A start-up that shares its proprietary information with a potential investor or partner without an NDA has blown the second prong by failing to take “reasonable steps.” So even if the investor passes and doesn’t misappropriate your idea, evidence that you failed to obtain an NDA from the investor can and will be used against you if a third party, say a disgruntled employee, misappropriates your trade secret.
A potential investor or partner will respect you more if you act professional and insist on an NDA.