In Silicon Valley, the Conversation Comes with a Nondisclosure Form
By PETER WALDMAN, THE WALL STREET JOURNAL
November 3, 1999
Copyright © 1999 Dow Jones & Company, Inc.
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SAN FRANCISCO -- There was romance in the resumes: She, a computer
consultant turned fashion model; he, an Apple Computer engineer turned
Silicon Valley entrepreneur. They were young, beautiful, wired for love. But
caution fell between them. During a yearlong courtship, Alfred Tom held
back, wary of revealing too much. Then it happened. After an afternoon with
friends, Mr. Tom took Angela Fu back to his car. There, on the front seat of
his 1994 Integra, he went for it. "Naturally, I flinched a bit," Ms. Fu
says. But in a stroke, it was done: a signed nondisclosure agreement, or
NDA, in the parlance of the Net set. Henceforth, Ms. Fu would be sworn to
silence about her boyfriend's trade secrets.
Cone of Silence
DNA, meet NDA, your twisted, alphabetical cousin in the world of baser
instincts. Long the province of lawyers, investment bankers and other
traffickers in corporate secrets, nondisclosure agreements have gone
mainstream. Propelled by the Internet frenzy, an epidemic of secrecy pacts
is spreading through personal relationships, passed between lovers, friends,
relatives, roommates, even business partners. The documents surface at
dinner parties, weddings and sushi counters. One entrepreneur NDAed his
rabbi, then his rabbi's wife. Bill Gates NDAed the carpenters working on his
home. Quincy Smith, who ran corporate development for Netscape before
becoming a venture capitalist, fields NDAs from his parents' friends,
attached to business ideas.
'E-Commerce Personalization'
Ask young and breathless Net heads at a picnic or family barbecue what
they're working on, and you'll probably get back some blather like, "An
end-to-end solution for e-commerce personalization in the
business-to-business space." Ask what that means, in plain English, and out
comes the NDA, materializing from breast pockets and knapsacks, PalmPilots,
picnic baskets and glove compartments. "It's one of the critical items for a
date: car keys, credit cards, condoms, and an NDA," says high-tech
consultant Mark Macgillivray. Most of the forms involve one or two pages of
standard legalese, pledging the signatory to silence concerning the bearer's
"intellectual property." Judges have ruled NDAs enforceable in all 50
states, lawyers say, but good luck bringing tongue-waggers to court. Proving
that somebody leaked proprietary information is seldom worth the time and
expense it takes, attorneys say. Still, the truly paranoid -- and
indiscreet -- collect hundreds of sworn secrecy pledges before their
businesses ever earn a dime.
Philip Lee, co-founder of SportBug.com -- "performance feedback over the
Internet using satellite tracking" -- usually makes people add their
signatures, petition-style, to a two-sentence NDA he keeps scribbled on the
back of his notebook. But caught unprepared at a restaurant recently, he
dashed off a fresh secrecy oath for some business-school buddies on scratch
paper, with his lawyer, who happened to be dining with him, adding
"syllables and threatening language over my shoulder," says Mr. Lee, 31
years old.
Mystical Incantation
"The NDA is the 21st-century equivalent of the medieval wax seal," says Kent
Walker, associate general counsel of Netscape. "It's a mystical incantation
people rely on, when in fact the only real security is to keep your mouth
shut." Mr. Tom tried that with Ms. Fu, until things heated up. At first,
when his girlfriend asked about his work, "he said he'd tell me eventually,"
Ms. Fu, 29, recalls. Finally, after dating a year or so, he popped the form.
"I didn't even read it," she says. "I totally trusted him and I knew he
trusted me." Really? After Ms. Fu signed the NDA, "I still didn't tell her
much," says Mr. Tom, 30, who, suffice it to say, is developing a
wireless-communications product. "But at least she could feel part of the
conversation."
Techies accept NDAs as part of the landscape. Some people from other walks
of life, however, still bridle at being asked to commit their loyalty to a
legal document to catch up with old friends. Internet entrepreneur Eddie
Lou -- "We're a first mover in a large, business-to-business vertical
space" -- had no problem getting his roommates, friends and girlfriend to
sign NDAs. He keeps extra forms in his car.
The Hang Up
But recently, two college buddies in the East, in separate phone calls, hung
up on him when he told them they'd have to sign NDAs before hearing about
his business.
When he called back one of them, a close fraternity brother who works in
finance in New York, it happened again. "He said, since he's not signing the
NDA, he's not in a position to talk to me, and hung up," says the
28-year-old Mr. Lou. "Everybody here says 'Give me the NDA,' but people
outside this area don't understand." In most gatherings of digerati,
wielding NDAs confers an aura of value on a start-up, even when, as in many
cases, there isn't any. But spring one on the wrong person, like a venture
capitalist, "and it's like writing on your forehead, 'Look at me, I'm
clueless! I don't know how the game works,' " says Silicon Valley financier
Guy Kawasaki. That's because the bigwigs of the Internet crowd -- the
professional investors, consultants, securities analysts and top technology
writers -- scoff at NDAs and don't sign them on principle. They say they see
too many similar ideas, dozens or more a week, to have their tongues tied by
any single one. Instead, they preach the honor system to prospective
entrepreneurs. Yet horror stories abound of venture capitalists and others
who said "trust us," only to use secrets gleaned from one business plan to
help another.
In the Dark
"Not only are NDAs important, but I think start-ups should go a step
further," says Internet tycoon Sabeer Bhatia, who doesn't even tell hires
for his latest company what they're working on until they show up for work.
Mr. Bhatia, 31, credits secrecy with giving his first startup, Hotmail, a
decisive six-month lead on the competition, paving the way for its sale to
Microsoft for a reported $400 million in stock. For Hotmail, Mr. Bhatia
collected more than 400 NDAs in two years, from employees, friends,
roommates -- but no girlfriends. "A beautiful woman is a beautiful woman,"
he says. "I just don't tell them about my business." Mr. Macgillivray, the
consultant, was chatting with friends at a crowded party recently, when
somebody piped up with his latest business idea for an obscure
computer-graphics process. "Two sentences into it," Mr. Macgillivray says,
"he pulled out the NDAs. Even the other Valley people looked at him and
said, 'You've got to be nuts! We're at a party, pal.' He looked at us with
disgust, more convinced than ever we were all there to rip him off." Jim
Busis, co-founder of Wishbox.com -- "a universal gift-registry for Gen Y"
based in Pittsburgh -- brandished several NDAs at the end of a small dinner
party in his honor, taking several old friends by surprise.
Nothing Personal
"Here's a man to whom I confided many of the most intimate details of my
bizarre divorce, swearing secrecy from me?" says Liz Perle, editor at large
of publishing-house Harpers San Francisco and a friend of Mr. Busis since
college. Mr. Busis, 43, explains NDAs are nothing personal, just a legal
formality. He also NDAed relatives and friends in town for his daughter's
baby-naming ceremony last spring, he says. The rabbi who officiated at the
ritual, and the rabbi's wife, signed in Mr. Busis's car on the way back to
their hotel. "At first I giggled and thought, 'Who does Jim think I'm going
to tell about this?' " recalls Rabbi Lennard Thal, vice president of the
Union of American Hebrew Congregations in New York. "Then I was sort of
flattered that he might actually have thought, in the circles I run, anyone
would be interested."