Monday, October 24, 2011

The death of the simple NDA

Non-disclosure agreements may never have really been simple, but they do seem to have become more complex in recent years.  No doubt part of the reason for this is the increasing sophistication of those writing and managing NDAs.  

Whatever the cause, the result is a substantial amount of risk for companies and individuals who dismiss NDAs as mere "boilerplate."  It is now as crucial as ever that those doing business with others use NDAs and, when using others' forms, read them carefully.

Here are a few challenging positions I have seen in NDAs that I suggest users approach with caution.  

1.  Assignment of intellectual property ownership.  An NDA is designed to simply allow two parties to start talking to one another about a deeper relationship.  Yet, in a couple cases, I have actually seen an NDA provide for one party's ownership of everything created over the course of the relationship.  No proprietary technology company will sign up for this.    

2.  Non-competition provisions.  Occasionally, NDAs will prevent one party from competing with the other.  This is another aggressive position with economic implications far beyond the NDA's typical "Let's talk" premise.  Non-competition provisions may also raise anti-trust issues.

3.  No-hire provisions.  Some NDAs will prohibit the solicitation of the other party's employees or customers.  Others will take the next step of seeking an actual no-hire clause.  Either provision will drive how the parties interact with one another.

4.  Lack of an independent development carve-out.  Most NDAs provide exceptions for what kind of information is deemed confidential.  A crucial exception that is sometimes missing regards independent development.  It's important to be able to retain the right to come up with good ideas independently of those that a vendor, customer, reseller or joint venture partner might have.

5.  Inappropriate period of protection.  NDAs will typically provide for a confidentiality period of about five years.  But, a business providing access to its most sensitive secret sauce that it expects to be valuable for decades would certainly want more protection than that.  It's important to think through how an NDA will be used in a given situation before signing up for a certain period of protection.

6.  Venue provisions.  Parties will often agree in advance where to litigate a dispute arising out of a contract.  But, this choice of location could create leverage for one party over the other.  Be thoughtful about agreeing to venue in your business partner's backyard if it's thousands of miles away from where you work. 

7.  Inconsistencies with other applicable documents.  If some other commercial agreement is signed as a result of the initial discussions, it will be important to consider how it relates to the NDA.  A new agreement with its own confidentiality provisions could create confusing conflicts with the NDA.  The NDA needs to be either completely superseded or carefully integrated into the new agreement.   

Monday, October 3, 2011

Insider PSA: "You're shady and self-dealing"

Venture investor Chamath Palihapitiya recently wrote a critical e-mail to the founder of Airbnb.  Palihapitiya passed on the opportunity to invest in Airbnb's latest financing round.  His criticism focused on a controversial and unusual element of the transaction.  In a nutshell, a dividend to common stockholders was being used to provide cash to founders to the disadvantage of other employees.  The e-mail raised many valid points and some good coaching, including the sentence, "Treat your employees the same as you'd treat yourself."

So what's the problem?

The problem is that the e-mail was somehow leaked to a reporter.  Given the amount of confidential information Palihapitiya was given, this amounted to a credible insider public service announcement that the founder could be considered, as the e-mail put it, "shady and self-dealing."  I don't believe that Palihapitiya intentionally leaked the e-mail, but the disclosure was embarrassing to all involved.

It's also symptomatic of a couple challenges in Silicon Valley's business culture.  

We have become too reliant on e-mail to communicate in detail about sensitive topics.  Coaching and constructive criticism are valuable, but e-mail is often an unhelpful channel for it.  

In addition, Silicon Valley is sometimes too open.  We have open office spaces.  Many investors refuse to sign non-disclosure agreements.  Some companies sign NDAs without reading or thinking about them - a very risky practice given that I have actually seen proposed "NDAs" in the last few years that assigned all intellectual property created in the business relationship to one party.  Every thought is posted on Twitter.  The "confidential" footnote is not inserted in the first place or ignored.

It's a good time to revisit the value of 1:1 verbal communication and confidentiality.  Not everything is meant for public dissemination.

If Palihapitiya's email "really was just an attempt to give (the founder of Airbnb) private feedback," he should have picked up the phone.