More startups sharing without legal protection
In 2011, Andy Moeck was looking for investors for Moeo, a Los Angeles startup he was building that makes mobile gaming apps based on real-time sporting events. A friend introduced Moeck to a partner at the Silicon Valley venture capital firm Kleiner Perkins Caufield Byers, and at their first meeting, Moeck asked the partner to sign a nondisclosure agreement.
Such agreements, known as NDAs, are designed to prevent an idea or technology from being stolen and copied. Moeck was especially concerned because the venture capital firm was already backing Zynga, another gaming company.
"We knew they didn’t have a mobile or sports strategy," he said of Zynga. "I didn’t 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 NDA, leaving 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," Hwang said.
Not everyone agrees.
Thom Ruhe, vice president of entrepreneurship at the Kauffman Foundation, said the declining use of NDAs "is certainly not in the interests of entrepreneurs. It favors the VC. Although it is rare that an investor steals an idea, 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, "they’ve made the easier and less morally defensible position -- no NDAs -- the coin of the realm."
Even if a startup manages to get an agreement signed, it can be tough to enforce, said Aaron I. Messing, a lawyer with OlenderFeldman in Summit, New Jersey.
"It’s very hard to prove that you kept information confidential, and it was only disclosed under an NDA," said Messing, who represents both founders and investors. "And it can be expensive."
Investors say signing such agreements is impractical for them, too.
"VC firms and angels are looking at so many more deals today, that they could freeze themselves out of a given area by signing an NDA 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 NDA is signed, it stalls the conversation for a week because of the legal work involved, Hwang said, and over time, that can give a competitor the opportunity to enter a market first.
"In the life of a startup company," he said, "you might have to sign 30 to 50 NDAs. That’s a week each time and a year of holdups. The risk of going slow is bigger than the risk of being copied."
When Moeck was told that Kleiner Perkins does not sign NDAs, he decided to pitch his startup anyway.
‘I felt OK about it because the investor was referred by a trusted friend and Kleiner is a very well-known firm," he said.
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 didn’t 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 angels. It continues to ask investors to sign NDAs, but has yet to persuade any to do so.