A Classic Startup Horror Story

> NDA is not the same as non-compete, or am I wrong on this?

You're right, they're not the same.

A nondisclosure agreement ("NDA") typically includes restrictions on both disclosure and use of the confidential information in question. A noncompetition covenant is sometimes used as a means of enforcing an agreement's use restrictions. It says, in essence, "to make sure you don't use our confidential information without our permission, you agree not to compete with us at all in the following geographic area for the following time period ...."

NDAs are commonly used to help two (or more) parties decide whether they want to do business with each other. As a result, NDAs per se hardly ever contain noncompetition provisions --- it's usually too soon in the parties' relationship for one of them to be making that kind of commitment.

Putting a noncompete in an NDA would be tantamount to a man and a woman agreeing to get a coffee to get to know each other --- and the woman says, oh by the way, I need you to agree that, for the next two years, you won't talk to any other women. Imagine the guy's reaction ....

A slightly different situation is when one company (the acquirer) is talking to another (the target) about a potential buy-out. When things start to get serious, the parties likely will sign a no-shop agreement that says, in essence, the target won't go looking for other potential acquirers. (The target's board of directors may have a fiduciary responsibility to its shareholders to consider other unsolicited offers.)

I was out with an investment banker at a social outing, and I asked him "What's the biggest mistake startups make during the acquisition process?" He said, "Buddying up with their potential acquirer. Once you express strong interest in getting bought, you've just lost all negotiating leverage. You've got to play coy with potential acquirers until the deal is signed."

No corporate development person is going to take a deal to the CEO without having gone through dilligence. So as the selling party, you're forced to subject yourself to this kind of process.

However, you don't have to actually answer everything you're asked in this financial (and technical) cavity search. In one M&A process I participated in, the buyer asked the seller to "tell us your strategic vulnerabilities: if someone wanted to totally shut you down via technical, legal, or data means, how could they do it?" The sellers politely refused to answer this.

Bottom line: there are no rules, and it often seems no one feels any shame doing the most utterly awful, unbelievable things during these M&A processes. NDA's don't mean jack, and if you don't answer enough of the questions, they simply cannot buy you. Choosing which questions to answer, and walking away from all the others, is key.

And, as another commenter said: don't ever need to sell. If you really need to sell, you're probably already doomed.

This link goes to the second page of a two page story.

Although this scenario is very common, it's not common for the story to get shared. Thanks to the entrepreneur that shared it.

One of the reasons that folks don't share their horror stories around M&A is that often, in the back of their minds, they're still hoping that it was all just a big misunderstanding (wishful thinking). They're often also worried about creating a negative impression around the company -- thereby potentially jeopardizing deals with others in the future.

In cases with truly bad faith, the "acquirer" can actually exploit these two things.