Navigating High-Stakes, Sensitive Inter-Company Discussions
The Scenario: Imagine you’re a founder and/or CEO of a startup in talks with a potential acquirer. The acquirer is eager to learn about your tech stack and expresses a desire to engage more deeply with your company. However, the conversation quickly escalates as they assert that they could build the technology themselves, despite having only a surface-level understanding of what makes your solution unique. Their tone might even carry an air of bravado, making the exchange challenging and uncomfortable.
Broader Application: While this situation is most intense with potential acquirers, it’s equally relevant when dealing with prospective partners or investors. In these scenarios, they too may press for deeper insights into your intellectual property (IP), often pushing the boundaries of what you’re comfortable sharing.
The Challenge: These discussions are delicate. On one hand, you want to make a compelling presentation that sparks genuine interest and demonstrates the value of your technology. On the other, you must be cautious about over-disclosing sensitive information. Revealing too much could put your company at risk, especially if the other party is tempted to replicate your solution. Striking the balance between transparency and protection is crucial, and it requires strategic planning and a firm grasp of your company’s boundaries.
Questions abound:
What precautions should we take?
How much information should we disclose?
Does an NDA truly offer protection?
What are we missing?
Is being overly cautious a mistake? In other words, could it cost us the deal?
You are correct to be cautious. It’s essential to take precautions, beginning with carefully limiting the scope of the information you choose to share. As trust builds and you become more confident in the intentions of the other party, you can consider gradually disclosing more.. It's also important to note that the legal effectiveness of NDAs remains a subject of ongoing debate, not to mention the rising costs and complexities of litigation.
Here are some recommendations:
Engage Legal Counsel: Legal counsel is critical in M&A and partnership discussionsto protect your IP, draft or upgrade confidentiality agreements, and guide you through the complex legal and financial landscape. They mitigate risks, structure deals strategically, and ensure that your interests are well-protected throughout the process. Seek legal counsel before disclosing proprietary information, especially technical insights, to protect your IP. Engage legal counsel to negotiate terms like valuation, indemnities, and non-compete clauses. Involve them in reviewing or drafting critical documents like LOIs, term sheets, and acquisition agreements. Also, use their expertise if conflicts or concerns arise during the process.
NDA and MNDA Confidentiality Agreements: If you've already signed an NDA, it might be wise to consider upgrading to a more robust NDA that offers greater protection. Ensuring your confidentiality agreement is comprehensive can give you extra peace of mind.
One of my favorite lawyers often tells startup founders, "The people you most want to sign NDAs are usually the least likely to do so," implying that the most valuable or influential people, like investors or experienced industry players, often refuse to sign NDAs to avoid legal complications. So, requesting a more stringent NDA often leads to resistance, serving as a true test of intentions.
Information Disclosure Strategy:
Limit to High-Level Details First: During the initial stages, focus on providing a high-level overview of your tech stack. Highlight the unique value your technology offers without revealing detailed technical specifics. Emphasize how your solution effectively addresses a problem, rather than explaining the intricate mechanics of how it operates.
Layered Access: If the discussion progresses and requires deeper technical details, consider releasing information incrementally. Assess the other party’s understanding and reaction at each stage before choosing to share additional insights.
Hold-off Discussing Personnel Info: When discussing personnel details, particularly responsibilities and contributions, consider agreeing to address this topic last. Recruitment strategies, such as aqua-hires and reverse acquisitions, can easily lead to the creation of a future competitor.
Emphasize Competitive Advantage: Make it clear that while certain elements of your technology might appear replicable, the true competitive edge lies in your team’s unique market know-how, customer expertise, proprietary data, strategic integrations, or specialized optimizations that are not easily reproduced. Frame your technology as an interconnected ecosystem that provides far more value than its individual components. Position the platform for acquisition, not individual products or pieces.
Track What You Share: Keep a detailed record of all the materials and information you share. Note the specifics, including dates, content, and the context of each disclosure. Proper documentation not only safeguards you in case of future disputes but also provides clarity on what has been shared. It also signals to the other party that you are committed to protecting your disclosed information, suggesting that you have a substantial amount of valuable data that requires careful management.
Consider prohibiting the use of AI notetakers during discussions. This can serve as a significant indicator to the acquiring party, underscoring the gravity and exclusivity of the information being shared. It also reinforces your control over sensitive details, ensuring that the exchange remains secure and deliberate.
Remember, your caution is justified. However, sharing information is essential for the other party to understand your team, technology, and company well enough to decide whether to invest, partner, resell, acquire, or ultimately disengage.