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A Classic Startup Horror Story

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Re: A Classic Startup Horror Story

#21

Post by dctoedt »

All is not lost, and the start-up shouldn't despair, for a couple of reasons:

1. It's not unknown for acquisition deals to get put on the back burner for a while, even a year or two. That happened to my former company when it was acquired. (This history was publicly disclosed in my company's proxy filing with the SEC [1].)

2. The Company's lawyers are likely to tell them, forcefully, to be very careful about trying to redevelop the technology, precisely because of the NDA.

Suppose that The Company didn't use completely different people (a "clean room" approach) to redevelop the technology. In that case, a jury might not believe they really did it independently.

In a somewhat-similar situation in the mid-1990s, Rockwell International got tagged by a jury for almost $58 million for breach of an NDA with a small start-up company concerning circuitry for improving data transmission rates over analog cell phones. (Disclosure: I was co-counsel for Rockwell at the trial.) [1]

(To be sure, The Company's engineers and executives might well convince themselves that they really did redevelop the technology independently, without using the start-up's confidential information. That could make it difficult to settle the case: The important decision makers might sincerely believe The Company didn't do anything wrong.)

[1] http://google.brand.edgar-online.com/displayfilinginfo.aspx?...

[2] Celeritas v. Rockwell, http://www.ll.georgetown.edu/federal/judicial/fed/opinions/9...

[edited]

Re: A Classic Startup Horror Story

#22

Post by jpdoctor »

jonny_eh wrote: post #20
jpdoctor wrote: post #19

> “If you agree to these terms, we have a gentlemen’s agreement that you’ll stop talking to other companies?” ... We agreed. It turns out that's an intelligence test: Anybody worth having a gentlemen's agreement with would be gentlemenly enough to put it down in writing. The correct answer is: Put it in writing. Edit: NDA's are another intelligence test btw. All of the entanglements without any of the enforceability.

So you're intelligent if you don't demand an NDA?

Not quite. It's more like: You're not intelligent if you think an NDA is worth a damn (as the article shows.)

Re: A Classic Startup Horror Story

#23

Post by [deleted] »

jonny_eh wrote: post #20
jpdoctor wrote: post #19

> “If you agree to these terms, we have a gentlemen’s agreement that you’ll stop talking to other companies?” ... We agreed. It turns out that's an intelligence test: Anybody worth having a gentlemen's agreement with would be gentlemenly enough to put it down in writing. The correct answer is: Put it in writing. Edit: NDA's are another intelligence test btw. All of the entanglements without any of the enforceability.

So you're intelligent if you don't demand an NDA?

[deleted]

Re: A Classic Startup Horror Story

#24

Post by gyardley »

This is also a classic bigger-company horror story -- when the developers who said "this isn't so hard, we can do it ourselves" start working on it and run into all the tiny little gotchas that aren't evident in due diligence.

Maybe I've just been exposed to a weird sample, but I've heard 'we can do it ourselves' at least a half-dozen times over my career and not once has anyone actually done it themselves.

Re: A Classic Startup Horror Story

#25

Post by pg »

This sort of scenario is unfortunately very common. The antidote is never to allow acquisition talks to be the main thing you're focusing on. We advise startups who get approached by acquirers to treat it as a background process, and not to take things seriously until the very last stage. If acquisition discussions are just a side show, you can easily terminate them if anything goes wrong. Which, interestingly, probably decreases the chances of things going wrong. M&A guys can smell it when you really want a deal, and that makes them want it less.

Re: A Classic Startup Horror Story

#26

Post by nkoren »

rokhayakebe wrote: post #12

Dude, seriously, this isn't helping anyone unless you give some clues allowing people to figure out who The Company is.

The Company could be virtually anyone. I have seen this scenario play out multiple times in multiple industries.

In this case, naming The Company would actually be less helpful, not more. If you go into a deal thinking "hey, I can trust these guys; they're not like those louts from ACME Crockpots Inc. that I read about," then you're setting yourself up for trouble. Much better to approach an acquisition deal thinking that these guys might be 'The Company', and taking precautions accordingly.

Re: A Classic Startup Horror Story

#27

Post by archangel_one »

rokhayakebe wrote: post #12

Dude, seriously, this isn't helping anyone unless you give some clues allowing people to figure out who The Company is.

Actually, I think the general lessons can be learned regardless. Naming The Company would turn it into mudslinging which would change the tone of the article, and IMO probably not for the better.

Re: A Classic Startup Horror Story

#28

Post by AznHisoka »

brooknam wrote: post #2

Having seen a startup in Austin, TX go through this same kind of thing, I would guess its more common than the author makes it sound here. The best defense is to build a technology that isn't cheap to reproduce. There is no better moat than killer IP.

This is not practical advice. Not many people here are building the cure to cancer. The best defense is to build a self-sustaining business where you don't need to sell it.

Re: A Classic Startup Horror Story

#29

Post by saturdayplace »

pg wrote: post #25

This sort of scenario is unfortunately very common. The antidote is never to allow acquisition talks to be the main thing you're focusing on. We advise startups who get approached by acquirers to treat it as a background process, and not to take things seriously until the very last stage. If acquisition discussions are just a side show, you can easily terminate them if anything goes wrong. Which, interestingly, proba…

> M&A guys can smell it when you really want a deal, and that makes them want it less.

This seems perverse, but I'm guessing that there's some kind of economic intuition these guys have gained from being around deals all the time? Something like, "Wants a deal == needs it == a bad investment." This just seems to confirm that the best way to get money thrown at you is to not have a need for it.

Re: A Classic Startup Horror Story

#30

Post by pnathan »

roel_v wrote: post #17
brooknam wrote: post #2

Having seen a startup in Austin, TX go through this same kind of thing, I would guess its more common than the author makes it sound here. The best defense is to build a technology that isn't cheap to reproduce. There is no better moat than killer IP.

"The best defense is to build a technology that isn't cheap to reproduce." Actually that's the single worst defense. What can possibly be so expensive to produce that it can't be cloned, yet cheap enough to be possible to sell with profit? The fact of the matter is that most software is quite simple, and when it solves a particular problem in an innovative way, there is no way to capitalize on that because there's no…

Conceptually, if very smart people did it, and other very smart people say it can't be done... that's what you're looking for for a deep moat. Usually that's going to be some sort of new mathematical principle in software.

It's excruciatingly hard to get funding if you do come up with that sort of idea, because the experts all say its impossible. ;)

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