To NDA or Not to NDA, this isn't really a question...

There is a stain of thought, one prevalent in the venture capital community and elsewhere, that NDAs some how mark you as a novice, neophyte, or worse, a rube.

This line of thinking starts from the moderately dubious premise that VCs are all honest money, and they are too busy being efficient stewards of capital flow to even contemplate, let alone effectuate, the misappropriation of the finer points of your next big thing(TM). Secondly, the argument flows, if investors signed NDAs, what is to stop jilted Founders from suing them every-time the failed to back their company over a competitor. "Law suits are expensive, and we just don't want to risk exposure for an unlikely event."

I tend to find this reasoning akin to a hotel telling its customers that they don't provide locks to the room doors. The reasoning would be "Locking your door is, in essence, an insult to the ethics of our employees, and it passes a cost in terms of "locks" onto hotel, which is impermissible." Agreeing to this is totally reasonable, right? The odds that someone is going to break into your hotel room are statistically slim, so why worry about locking that door, or even have locks to begin with?  A hotel break-in is a low probability, high impact event. One that has an absurdly low risk control component. The cost of locking your door is low to you, given the potential down side of not locking it.  The cost of the Hotel providing locks to all its doors is high given how often people break into rooms.  

Therein lies the rub. Whose job is it to manage risk. The customer, or the seller.

The truth is that VCs see hundreds of companies, lots of time these companies are direct competitors to your company.  No amount of NDA language is going to give you complete comfort that some portion of your next big thing isn't going to get passed around like a handle of fireball at a Tennessee wedding.

However, that doesn't mean that you shouldn't make sure that you protect as much as you can. Big capital players usually have some form of internal control to at least minimize law suits, so it is not the end of the world if they don't sign, remember execution is much more important than  conception.  But ask questions, be knowledgeable about how they safeguard confidential information. If there are no locks, are there burly security guys on every floor?

However, if you are dealing with small angel investors and syndicates (potentially first time investors) that might a) not have the institutional controls, and b) internal discipline to keep things confidential, then make sure that you are using some form of NDA. Some of the smaller players might not have the systems in place to protect information, so a NDA can focus the mind. If you are dealing with anyone less than a household name in the industry, there is no harm in the ask. 

Asking for NDAs goes beyond investors. If you are outsourcing any part of your Dev team, NDAs are a good way to get people on the same page, as well as giving you legal recourse for straight up IP theft. (This does happen, regardless of what people tell you.)

All things being equal, even if no one agrees to sign an nda, you can still protect yourself.  We advise filing low cost provisional patent applications that cover your pitch deck. That way, even if your disclosures become public knowledge, you still have the potential of protecting the IP through the patent office. 

Never forget that VC money is not doing you a favor. Their job is to allocate capital, maximize return, and minimize risk. It is not your job to make their job easier by not protecting your intellectual capital.

Jordan Garner. 

Some thoughts on legal technology business models

The start of the New Year is a great time to revisit the basic premises that underpin business models.  For CodexJuris generally, that business model is legal software technology.

In the last year we have launched Baselex (www.baselex.com) a forum for lawyers to share difficult to find legal tidbits, the kind that frustrates easy googling and makes attorneys inefficient.

In the future, 2015 and beyond, we hope to launch other projects that tackle some of the inefficiencies in the practice of law.

However, the goal of reduced inefficiency is not always the primary goal of Legal Tech start-ups. Broadly categorizing, legal tech falls into two, non-mutually exclusive, camps. The first are outfits that that seek to replace expensive lawyers, usually with some combination of cheaper lawyer stables and intelligent work-flow systems. The second, are outfits that seek to replace inexpensive lawyers and staff with technology. Usually though software  designed to make expensive lawyers more efficient. Think of the first one as a market place for auditioning solo lawyers (like Angie's List, but for legal work) and second as modular document generation (the Baselex document repository). Of the two, I would place my bets (and I have) on the latter being more successful than the former.

Why? Well, the root of most things, money and risk. Lets take a hypothetical, suppose that Mega Company, and more particular, the in-house counsel of Mega Company, decided to outsource some bit of complicated legal analysis to a outside legal vendor. Vendor 1 is a start-up that claims they can supply the work product of a high-priced legal team by putting the client in touch with a low-cost legal team that has been pre-vetted.

Vendor 2 is a high priced law firm that has a sterling reputation for quality work and exorbitant fees. However, Vendor 2 is willing to cut the Company a deal, 60% of its normal fee, to do the project. 60% is a steep discount, but the Firm likely knows what it needs to make on its billable to be profitable and will use some Lawyer-Augmentation software to squeeze every last ounce of efficiency from the high-priced attorney (some poor associate). This can be done using optimized work-flows, semi-intelligent work product generation, and in case of software failure, a heavy wooden stick.

99 times out of 100, In-house counsel is going to go with Vendor 2. Why? Risk. Who assumes it and for what cost. In example 1, the in-house counsel assumes the risk for catastrophic screw-ups. If the work produced by the start-up was excellent, then everyone is happy that the Chief Counsel used such an innovative product.

However, if things go pear-shaped, and they do, who will receive the highest risk exposure? The start-up...nope. They aren't in the business of providing legal services, they are a match maker who takes a cut. The low cost contractors that the start-up sourced? Nope. They have an agreement, and mal-practice insurance (they do have mal-prac insurance right...).  Nope, the full weight of failure will fall on In house counsel. In the event of a catastrophe, it will be the chief counsel, or more likely an assistant counsel, whose squirming terror stricken body will be dumped before the Corporate Board to explain why it was a good idea to cut costs on a highly sensitive issue.

Going to the other extreme, if a well established, well regarded firm screws up, and it happens all the time, the GC can point to a number of factors to deflect blame. Specifically, going with a known quality service provider is a means of providing institutional cover to the decisions of a procurement officer. The GC can point to the prestige, the billing rate, the marble lobby and say "it was reasonable to assume these people knew how to do their job, not my fault." In this scenario, the GC is not paying for the expensive attorney out of his own pocket, and definitely not staking her personal livelihood on an unknown entity.

You can see this dynamic work out in today's legal tech market. Document production and review companies primarily serve law firms, not the end client. Some do, but the business model is to have the cost savings of using less expensive attorney go to the client and not the Doc review Company. The Doc review companies replace the low level attorney salary, and unload some of the risk. What they don't do, is replace the Law Firm.

If that weren't true, you would see document production companies turning into litigation powerhouses, instead of the rise of non-associate litigation / discovery analyst positions inside litigation powerhouses.

As such, a winning business model is supplying the existing legal industry with more sophisticated tech. Trying to supplant firms with Legal Tech is difficult, primarily since the only way to do that would be to provide an equivalent level of risk cover to the GCs. Moving fast and breaking things is a great way to dislodge entrenched tech outfits, but it is a great way to not get risk adverse GCs to become customers.