Non-Disclosure Agreement (NDA): Even With One In Place You Can Still Get Screwed

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Written by: Topics: Legal

Say you’re looking to do business with another party and you’ve got sensitive information you’d like to protect and avoid spreading around. Then you could use a Non-Disclosure Agreement (NDA).

In theory it should protect you.

Early on, because of my cautious nature, I jumped on every occasion to put an NDA in place. Looking back, I think to myself, man did I waste a great deal of time!

A short honeymoon

Initially, working on an NDA was exciting. What a powerful legal document, I remembering thinking over and over to myself the first few times I drafted one. You basically get a person or company to agree to keep its mouth shut in exchange for sharing with them sensitive information. It’s quite an empowering feeling. Especially if you, an individual, can get a major company to agree and sign a document guaranteeing their silence indefinitely or for a certain amount of time. Me vs. the massive corporation.

But that was early on. My relationship with NDAs has evolved since then. Now I need a damn good excuse to put one in place.

Big firms, big resources

When I worked for Paris Berkeley Capital legal docs were handled by an army of in-house legal experts. Sure, the bankers reviewed the agreements to make sure they made business sense but the legal tinkering was handled by the legal pros. That’s the beauty of an investment bank. The sheer resources at hand meant everything was covered by an expert group / division. The bank ran like a well-oiled machine. Everyone and everything had its place.

When I later set up my own company, that was certainly not the case. I became manager, coffee-boy, admin assistant, business development executive, analyst, intern, CEO and more, all at once. Even if you’ve got a real or virtual assistant helping out you’re pretty much responsible for everything at first. Isn’t that the nature of start-ups?

Luckily, I knew quite a few lawyers I could ring up for advice. Then again, I had to be mindful of special requests and favours. You need to save them for the right time. That meant I had to get comfortable with legal documents, fast.

I also came to realise it’s important to have your guards up when you’re small.

If you’re a big organization then it’s generally more difficult for others to harm you. There are consequences to going after behemoths like BP, Apple, Tata, China National Petroleum Company, Gazprom, General Motors, Saudi Aramco and the like. People will think twice before double-crossing those companies. Let’s face it, in some parts of the world you’ll disappear if you oppose the wrong company. But when you’re small people can easily step on you. And, unfortunately, in finance people are always getting screwed. The business of money can be cutthroat and merciless.

Mayfair

After leaving Paris Berkeley Capital, I worked out of Mayfair, which is a fascinating place. Those of you who haven’t been should visit. One weekend, grab yourself a takeaway tea or coffee and go on a little walk around Berkeley Square, Savile Row, Park Lane, Curzon Street and other nearby streets. You’ll discover hedge funds, private equity firms, Family Offices, private banks, investment banks and investment vehicles that haven’t even been properly defined – they do things that make them difficult to classify. These institutions will be flanked and neighboured by high-end art galleries, bespoke gentleman’s tailors, luxury yacht brokers and jewellery shops (guarded by men so big they could lift you up with one hand and strangle you to death in mid-air). It’s simply another world.

Mayfair also happens to house quite a few entrepreneurs. I got to know one of them. His name was Simon.

Perfume

When I met Simon, he was looking to raise about USD5 million to grow his business.

“The money will help me turn my business into a little empire,” he said during our first meeting.

A lawyer turned entrepreneur, Simon was in the business of buying distressed companies, turning them around and selling them several years later for lots of money. Having done this a bunch of times over the years, the man had done well for himself.

Two years before we met, Simon bought a little luxury perfume company that went into bankruptcy.  Then he got to work and eventually nursed it back to health. By the end of Year 1 the company did about USD1.5 million in Sales, and by Year 2 it did USD3 million. I can’t get into now but the margins were phenomenal – think Production Costs of $35 and Selling Price of over $300. Best of all, production, and to some extent distribution, was pretty much completely outsourced. Perfume bottles came from a bottle manufacturer in India. The perfume scent / mix was formulated and created in Dubai and then later finalised in the UK. The bottles were filled in a warehouse outside of London. There were 2 full-time staff and Simon, who was the CEO, and who only worked 2 days per week. And the market potential for their products was tremendous, especially in China, Russia and the GCC – places with growing taste for luxury goods.

I knew it was a gem.

Simon asked me to help him raise the money and I agreed. I knew some Russian and Arab high net worth individuals who were already active in the Retail and Fashion sectors. I figured it would interest them. Not only could they invest but also help the business grow within their respective geographies. So Simon would get more than just a cheque.

Inglorious bastard

A month later I met a finance guy at a business conference in London. We started chatting. In his mid-fifties, he wore a shiny pin-stripe suit and talked the talk. But there was something a little dodgy about him. I couldn’t put my finger on it. I just felt it. I should have listened to my gut and simply walked away but instead we kept chatting. He worked for a small advisory firm based out of Central London. Let’s call them DODGY CAPITAL.

“We should get together and explore cooperation,” he said.

I agreed and the following week we met.

The only project I was working on that had overlap with DODGY CAPITAL’s business was Simon’s fragrance business. So I shared a little information. I also revealed that Simon was looking to raise a bit of capital for expansion. I of course didn’t mention names. My suspicions about DODGY CAPITAL still persisted so I kept my cards close to my chest.

DODGY CAPITAL’s impression of the fragrance company was very positive. Their specialty, so they said afterward, was the Retail sector.

Surprise.

They immediately asked for more information.

With Simon’s okay to move ahead, I asked DODGY CAPITAL to sign an NDA before any information was shared. As they say, I wanted to cover my ass.

“Of course. Send it along,” was DODGY CAPITAL’s response. “We’ll sign it right away.”

So I did.

You can always get screwed

Once the NDA between my company and DODGY CAPITAL was signed I had comfort and shared the relevant material with them.

Yet their previous enthusiasm quickly faded and I heard nothing more from them after they obtained the information they wanted. I followed up a few times, to no avail.

Odd.

A few weeks later I heard from Simon.

“Let’s have lunch,” Simon said.

I met with Simon at the Lansdowne Club off Berkeley Square. He liked having meetings there.

“Someone got in touch with me,” he said.

He mentioned that a company had reached out to him and offered their services to help him raise capital. Simon had never heard of them and, strangely enough, they seemed to know quite a lot about Simon’s business. What’s more, Simon didn’t how they got wind of the fact that he sought capital.

Could it be DODGY F-ING CAPITAL? I asked who the company was and was reassured to learn it wasn’t DODGY CAPITAL.

They wanted to meet with Simon.

“Join me at the meeting,” said Simon.

“Sure,” I replied.

The big day

I was in the conference room with Simon when two guests arrived. Greetings and handshakes happened and then an exchange of business cards. I told the two guests I didn’t have any cards on me.

The two men had the same dodgy stink I smelled at DODGY CAPITAL. When Simon asked how they came to learn about his funding needs, one of them simply said that he used one of the perfumes, personally loved it and figured because there was big potential to grow it in other markets that the company was looking for external money. It was a guess, he claimed.

My ass.

Later that afternoon I did some research online and discovered that one of the members of the DODGY CAPITAL team was also a director at the company that had just come in to meet with Simon. DODGY CAPITAL had someone from the other firm contact Simon and get into discussions.

Unbelievable.

I wasn’t concerned about Simon moving forward with them. I was just taken aback by DODGY CAPITAL’s sneaky, disingenuous ways.

Is that the kind of reputation they want to have for themselves?

I pondered on ways to get back at them but then thought to myself: is it really worth the headache and negative energy to confront them?

The answer was no. It’s always best to avoid negative energy. Not worth the time.

I never heard from DODGY CAPITAL again.

Trust is key

Obviously, there are times you absolutely need to have NDAs in place. But I learned that if somebody really wants to screw you they can. This was just one example.

Another reason why trust is so important.

 

{ 10 comments… read them below or add one }

Raj February 14, 2014 at 11:24 am

How does Simon source the distressed companies, or the perfume one?

Did Simon ever move forward with DC? Did you ever let him know?

Reply

JPM February 14, 2014 at 12:35 pm

@ Raj
There are publications that list companies in distress.
Everyday businesses go bankrupt.
If you’re ready to get your hands dirty it’s a good way to make lots of money.

Reply

Jin February 15, 2014 at 12:43 am

Hello ibanker, what’s the best way to get an NDA if I don’t have lawyers?

Thanks and keep writing!!!!!,

Reply

The ibanker February 18, 2014 at 11:58 am

Hi Jin,
You can find plenty of resources online (e.g. http://www.hbs.edu/entrepreneurship/resources/legalissues.html).
Having said that, I will make available on this blog some samples and templates in the near future.
Take care,
Tib

Reply

AK February 15, 2014 at 7:51 pm

What kind of business did you start up once you left your job at Paris Berkeley Capital?

Reply

The ibanker February 18, 2014 at 12:01 pm

I set up several, from e-commerce and data intelligence to financial advisory. Made plenty of mistakes and learned and learned :)

Reply

Com'on February 21, 2014 at 5:51 am

Dude, NDA’s are the least enforceable contract out there. They’re a waste of paper and are only there to please compliance and keep lawyers employed.

Reply

Florian Lummert March 15, 2014 at 1:22 am

Thank’s for the post which is a good illustration of NDA issues in practice. I think negotiating NDAs is, first and foremost, something for lawyers to earn fees. Besides huge M&A transactions, I don’t think that it’s worth spending much time on the details. Put some basic clauses in place and that’s it. As you said, focus on the positive things.

Reply

John @ FirstStepFinance March 29, 2014 at 12:17 am

Guy, NDA’s are the least enforceable agreement out there. They are a spend of document and are only there to please conformity and keep attorneys applied.

Reply

The ibanker March 29, 2014 at 1:03 am

I’m reminded of the lawyers who used to battle over commas in an NDA as if they were working on the constitution of a newly independent state :)

Reply

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