Mistakes That Startups Make #4: NDAs

I have talked to thousands of startups over the last 15 years. And most of them make mistakes that dramatically limit their overall potential for success. An unbelievably small fraction of startups succeed and there are good reasons why.

There are few people that will tell you more firmly than I will that you need to protect your intellectual property. I have twenty five patents (a stack of paper 3 feet tall). And I have reviewed a great many companies for merger/acquisition and almost always my first question is “Do you have defensible intellectual property”?

Before you talk to anyone, if you think you have a unique concept, idea or product then file a provisional patent application. It currently costs only $125/each and there are services that will help you file that are available for under $200 for all the applications you want to file.

That means for $700 you can file four provisional applications. Yes it takes some work, but any investor will ask to see how you are protecting your IP. So, don’t say you can’t afford it. It is the best $700 you will spend. It puts a stake in the ground of when you identified your IP.  An NDA (Non-Disclosure Agreement) won’t protect your IP like a patent will.

Once you have locked in your IP, then you can start worrying about talking to other people. But, you have to do it right. VCs and angels will RARELY sign an NDA. But, they also don’t want to know the detailed mathematics or algorithms or processes or whatever that makes your product unique. They don’t need the secret sauce early on. They want to know only the high level values in the beginning.  Save the secret sauce for the latter stages of due diligence.

About 1 out of every 40 startups will send me an email and say ‘I have a great startup. Sign the attached NDA and we can discuss’.  No information on what the startup is, nothing at all. I always ask for some high level info, but sometimes they will refuse without the NDA. They are asking me to read and sign a contract without even knowing if the startup is within my areas of expertise and interest. Don’t want to tell me your secret sauce? No problem. But at least tell me if it has something to do with cloud computing or clothing design or gold mines or perpetual motion machines (yes I get those).

Some people will tell you “No one wants to steal your idea anyway”. I disagree. Remember: Lock in your IP! Don’t reveal your secret sauce unless there is a very good reason! An NDA will not protect your secret sauce!

You should create a brief description of your startup that describes why your startup is valuable without revealing your secret sauce. You also need a 3 minute description that you can tell anyone.

Let’s look at an example: You are at a trade show. Your startup has some amazing new technology for mobile carriers. You happen to catch the CTO of Verizon Wireless after he speaks at the event. Are you going to ask him to sign an NDA? You better have that 3 minute summary ready to knock his socks off or you will lose the opportunity of a lifetime.

If your startup is ‘better than sliced bread’ then be prepared to say “My product can slice bread 40% cheaper and 50% faster reducing the cost of bread production by 10% overall”. You don’t have to say “We utilize a proprietary technology involving iridium lasers and twelve bonded mirrors as reflectors to slice bread where the mirrors are at increasing angles of 3 degrees above the horizontal…blah…blah…blah”.

Discuss your value, not your secret sauce. And then people will sign NDAs and you won’t lose sleep.

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This is #4 in a series of 50 mistakes that startups make.

I am looking for a company that I can work with on their road to success.

I am the former Chief Technologist at Hewlett-Packard and the Chief Product Architect at Verizon. I hold 25 granted patents that are referenced by over 400 other patents. I have started five companies and driven them to success. I have two startups in stealth. I was on the M&A committees at HP and Verizon.

Drop me a note or connect with me: wdcroslin@gmail.com