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SMALL BUSINESS

SMALL-BUSINESS GUIDE

Why More Start-Ups Are Sharing Ideas Without

Legal Protection
By EILENE ZIMMERMAN

JULY 2, 2014

In 2011, Andy Moeck was looking for investors for Moeo, a Los Angeles
start-up he was building that makes mobile gaming apps based on realtime sporting events. A friend introduced Mr. Moeck to a partner at the
Silicon Valley venture capital firm Kleiner Perkins Caufield Byers, and at
their first meeting, Mr. Moeck asked the partner to sign a nondisclosure
agreement.
Such agreements, known as N.D.A.s, are intended to prevent an idea
or technology from being stolen and copied. Mr. Moeck was especially
concerned because the venture capital firm was already backing Zynga,
another gaming company. We knew they didnt have a mobile or sports
strategy, he said of Zynga. I didnt want to pitch Kleiner about what we
were doing and have them go back and say to Zynga, This is how Moeo
does it.
But the Kleiner Perkins investor refused to sign an N.D.A., leaving Mr.
Moeck to decide whether to proceed with his pitch.
It is a common quandary, and not just in Silicon Valley. Ten years
ago, it was not unusual for entrepreneurs to request and potential
investors to sign nondisclosure agreements. But today the agreements are
largely considered a thing of the past. In fact, some investors say they walk
away from a founder who even suggests signing one.
This cultural shift, which began in the late 1990s and accelerated

during the early 2000s, began in Silicon Valley, said Victor W. Hwang,
chief executive of T2 Venture Creation, an investment firm in Portola
Valley, Calif. One of the most advantageous things an entrepreneur can
do is talk about their company to anyone who will listen, Mr. Hwang said.
Not everyone agrees. Thom Ruhe, vice president for entrepreneurship
at the Kauffman Foundation, said the declining use of N.D.A.s is certainly
not in the interests of entrepreneurs. It favors the V.C. Although it is rare
that an investor steals an idea, Mr. Ruhe said, it does happen. But in the
skewed echo chamber of the Valley, and the sycophantical networks that
aspire to be just like them, he said, theyve made the easier and less
morally defensible position no N.D.A.s the coin of the realm.
Even if a start-up manages to get an agreement signed, it can be tough
to enforce, said Aaron I. Messing, a lawyer with OlenderFeldman in
Summit, N.J. Its very hard to prove that you kept information
confidential, and it was only disclosed under an N.D.A., said Mr.
Messing, who represents both founders and investors. And it can be
expensive.
In 2011, Ben Goodwin started using a co-packer to package a probiotic
drink for his company, which is based in Santa Cruz, Calif., and now
called Obi Probiotic Soda. The co-packer took some of Mr. Goodwins
ideas and went on to make his own probiotic drink. I couldnt sue him,
Mr. Goodwin said. It was going to come down to a he said, she said. I
have to prove that he definitely took it from me and that I am experiencing
damages and losses as a byproduct of his actions. And that means I would
need the legal and financial resources to pursue that route, which isnt
really practical for a small business.
Investors say signing such agreements is impractical for them, too.
V.C. firms and angels are looking at so many more deals today, that they
could freeze themselves out of a given area by signing an N.D.A. with one
person, said Peter C. Wendell, a faculty member at Stanford Graduate
School of Business and the founder and a managing director of Sierra
Ventures, a tech-oriented venture firm in Silicon Valley.

Each time an N.D.A. is signed, it stalls the conversation for a week

because of the legal work involved, Mr. Hwang said, and over time, that
can give a competitor the opportunity to enter a market first. In the life of
a start-up company, he said, you might have to sign 30 to 50 N.D.A.s.
Thats a week each time and a year of holdups. The risk of going slow is
bigger than the risk of being copied.
When Mr. Moeck was told that Kleiner Perkins does not sign N.D.A.s,
he decided to pitch his start-up anyway. I felt O.K. about it because the
investor was referred by a trusted friend and Kleiner is a very well-known
firm, he said. Mr. Moeck also felt that even if Zynga did learn what he was
doing, the company had become too big to execute quickly. I thought,
regardless of what Zynga heard or thought, we had the better chance of
being successful in our category, he said. He was also hoping that
disclosure might open doors. Although we didnt want Zynga to copy us,
he said, we did want them to be aware of what we were doing in case
there was an opportunity to partner with them.
In the end, Kleiner did not offer financing to Moeo, although the
company did manage to raise $500,000 from angel investors. It continues
to ask investors to sign N.D.A.s, but has yet to persuade any to do so.
Below are some guidelines to consider. They apply when engaging not
just investors, but also manufacturers, partners and even customers.
DO NOT ASK UNLESS YOU HAVE SOMETHING TO
PROTECT. Chris Schultz, an entrepreneur and partner in the angel
investment fund Voodoo Ventures in New Orleans, said: Everyone thinks
their idea is extremely unique, but the idea is really 1 percent of the value.
The value is in the execution.
Paul A. Jones, co-chairman of the venture best practice group at the
law firm Michael Best & Friedrich in Milwaukee, said there was no reason
to share proprietary information during an initial 20-minute pitch
anyway. And Ive never known a reputable investor to steal an idea and
create a company around it, he said.
KNOW YOUR AUDIENCE. Before making a pitch, research the

background of your audience. Think through who you are sharing your
ideas with, said Patrick Riley, head of Global Accelerator Network, a
group of 50 start-up accelerators worldwide. Unless the investor is very
well known, have a reference or two. People will say they are investors
when they arent, so ask what other deals they have done, and then call
those companies to ask about the deal. Do they trust this investor?
Mr. Messing advised making sure an investor did not have potential
conflicts or overlapping investments. Reputable investors, he said, have
much to lose by stealing your idea.
CONSIDER FILING FOR A PROVISIONAL PATENT. C.
Andrew Keisner, a lawyer with Davis & Gilbert in New York City who
regularly counsels investors and start-ups, said the reluctance to sign
N.D.A.s was one factor driving start-ups toward patent protection. If
youre far enough along that youve developed an app or a prototype, there
is a big advantage to filing a provisional application, he said.
That is what Brian Nickerson and his co-founders at Chippmunk, a
coupon search engine, did. Before talking to investors and closing a
$750,000 investment round last December, their company, based in Los
Angeles, filed a provisional patent application for its search algorithm.
PROCEED GRADUALLY. When discussing a start-up, founders
should walk a fine line, conveying sufficient information about what is
unique and proprietary, but not disclosing information that would let
someone replicate the business. For example, said Mr. Messing, the
lawyer, an entrepreneur could disclose what an algorithm can do, but not
the algorithm itself.
Mr. Wendell of Sierra Ventures said founders should reveal
information as if they are peeling an onion. Its a gradual process, as the
entrepreneur increasingly engages the investment firm. You need to make
a few peels for it to be clear that this is an interesting opportunity and a
good fit.
A version of this article appears in print on July 3, 2014, on page B7 of the New York edition with
the headline: Why More Start-Ups Are Sharing Ideas Without Legal Protection.

 2014 The New York Times Company