How To Negotiate And Structure NDAs

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I'm Kisam Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during MA deals.

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Welcome to M and A Science Live, where leading M and A practitioners share lessons learned from their experience. If you're interested in keeping up with the latest from M and a science, visit mascience.com and subscribe to our free newsletter. Every Monday we share highlights from our interviews and publications so you can continuously improve your M and A skills. Again, that's mascience.com I'm your host Kisan Patel, CEO and founder of M&A Science. Joining me today is Mark Hofkin, CFO at Pantheon Platform. He's a growth executive focused on scaling technology businesses, building cohesive teams, coaching leaders and learning. Today we're going to talk about how to negotiate and structure NDAs. How are you doing today Mark?

Doing well. Thanks very much for having me.

Hey, let's kick things off with a little bit about your background.

I started my career in very traditional safe finance way. Spent about a decade in various forms of buy side financial services and a private equity firm in a hedge fund. Did a little bit of work in Europe, most of it in the US and then after getting my MBA and a few more years moved into core dev teams in technology companies. Moved into the finance roles in corporate technology world which was fun. Started at ebay in their corp dev team and very active corporate development organization at the time. Then moved to another marketplace to lead their FP and a team that was called upwork. It's a marketplace for freelancers. Business model is very similar to ebay's. That company is now public, doing extremely well especially in this climate. But now I'm the CFO of Pantheon. We're a B2B subscription software as a service platform for web apps and broadly speaking at the pre IPO stage. So I've had exposure to M and A in all three of those tech companies and have some stories to share.

Sounds like you're very well rounded for all things Finance and M and A here. And with that you've probably signed an NDA or two.

Probably quite a few. Yes.

And that's our topic. Let's jump right into it. How do you negotiate an NDA?

First, before we go in, just a reminder, I'm not a lawyer. Not a day spent in a law school. So. So everything I learned on the legal side was getting advice from corporate attorneys in these companies or outside legal counsel. And I'm not here to give any sort of legal advice. This is purely a practitioner's fate. The most important thing to me in negotiating an NTA is to remember that this is not a random piece of legalese that lawyers are going to talk on the side. And it's just a check mark that by policy both companies need to go through and carry on. This is a fundamental piece of the M and A process that fulfills two critical things. One, it establishes trust between the parties. It lays the framework for how the negotiation will carry on throughout the diligence. And then if this gets to the closing documents, how the parties will work with each other, how the commercial terms will be discussed, how the legal teams will work with each other, who has the balance of power, who is flexible and who is not. Who, who has the decision authority? Do you need to go three levels up for every minor decision to be made or is the person on the phone actually allowed to make legal and business calls on the terms that are being negotiated? So it really sets the tone for the process going forward.

All those things are covered in the NDA like all those things are laid out.

Well, what's laid out is the initial approach in the form that one of the parties uses. The first decision both parties have to make is when to engage in this NDA process. And that's definitely more of an art than science. My personal approach to this is you want to go into the legal aspect of the transaction of this relationship building phase as late as possible, but no later. The art is to take the conversation in very genital space to a place where both parties are comfortable and convinced that they are there and that it's worth it in getting into very strict legal and operational. We'll talk about it later, I'm sure. Legal and operational constraints and take on this multi year liabilities. Both parties need to take it seriously enough to get into this process. So to me, my rule of thumb is it's a sales process. Both parties sell, one sells, the best landing pad for the target and the target of the sales itself. To me, everything that can be Discovered through a number of GLG expert interviews should be discussed before the NDA. That's my rule of thumb. Anything that's in the sales pitch deck, as in to the customer, sales to the customer pitch deck, should be discussed. Anything that both companies can find out from talking to their respective clients, prospect former executives, analysts out in the wild. Obviously the websites, all of this can be talked about before meeting to get lawyers involved and get more specific on some of the terms. And some of them are easy to negotiate, some of them are hard to negotiate. But there's a lot to be said about the relationship building phase where everything that's in public domain is discussed fairly openly with the relationship and that the trust is being built. That's how I think about when to actually get the lawyers involved.

Let's hash out the timing and when to use an NDA. You're putting some perspectives there that there are some things that you don't necessarily need an NDA to have conversations around. Is there a certain timing in the deal process that makes the most sense to execute an NDA?

The red line to me is once you start getting into specifics of how the product works that is being acquired, when you start getting into explaining or attempting to explain what is exactly being done on the back end, or you're starting to get into details of your financial state, you're starting to get into the details of actual backgrounds of engineers or of key personnel. Once you start getting into this territory, you want to put on paper the actual terms and liabilities and operational procedures that both parties will carry on to protect the information that they receive. But before that, it's all about building interest mutually in this partnership that will last for many, many years.

So a bank deal bankers are going to fit this in their process and they'll probably come after a teaser sheet. Here's a teaser sheet. Before we disclose more information, we want you to execute NDA is this Hunter?

It's the teaser. And then in my experience, there is one more conversation after the teaser where the acquirer gets to ask fairly basic questions, like clarification questions on the information in the teaser. So when this is out of the way, and if both parties, and again both parties are interviewing each other, if both parties are interested, after that teaser clarification stage, this is where you may want to start bringing in the big legal guns and the fees that come with it.

Got it. It's probably going to be required for them to give you a formal SIM of the business.

Correct?

That makes sense. You can have a Teaser sheet, maybe have an initial conversation, get some clarification, but then likely going to need to execute this NDA before a sim as part of a bank process. Now, if you're doing a proprietary deal that's a little more open because it varies on the seller you're dealing with, whether they're experienced, sophisticated versus unsophisticated. How does that work? Is there a point where you just try to get as much information as you can on the buy side till the end the seller prompts you for an NDA? Or is that something where, hey, since we are going this route, let's get an NDA out there.

That's the art. If the disclosing party feels that you're on a fishing expedition, the relationship is just not going to work from the get go. Everything in the future will be tainted by how you have approached the party in the first place. So you really get a sense of how the other party feels answering the questions you're posing. It's good practice to suggest that, well, this is a point at which you may want to actually send us something or let us send you the NDA so we can ask you more questions. We're really interested in this. Again, think about it as what you would do to build the modicum of trust between the parties. If the buyer proposes it, you score points you may come across, especially if it's a competitive bid, you will make the seller feel more comfortable working with you the than working with somebody else. If in this process you're acting, obviously you're incentivized to close the deal and not lose the bit to a competitor. But everything you can do to instill a sense of you're already almost on the same team and we want to protect you, we want to protect ourselves. We are potentially more experienced than you are as an acquirer that has done many of those, all of those things build relationship and have a way to impact what eventually is done in a positive way.

So I heard negotiating the NDA sets the tone for negotiations of the deal that the timeframe it takes to negotiate the NDA, how much details you get into and start negotiating back and forth.

The process, how long does it take you to get a response? Is every minor point taking to GC of one of the companies and you need five approvals to agree to anything. How pedantic either of the parties is to every letter of the agreement? Is there a feeling that it's a part of the process and some of the questions are predetermined? Both companies have their stuff together. So to say they know how to structure a compromise. If one party's preference is to be on one end of the spectrum for a particular issue and the other party preference is to be on the other part of the particular issue, who is being more accommodating? Who is being more creative? Who listens to the other party? Yeah, we understand your concerns here. They're specific to you. But let us propose something that would work for you in this particular case. This tendency to find agreeable compromises is definitely part of the exercise for building the trust it will carry forward for the actual closing deal negotiations.

You'll get a sense of, hey, these people are easy to work with, or these people are really hard to work with and maybe don't even want to go down this path.

Exactly. Easy, hard, and how much time it takes. Those are two very critical dimensions. If your company can get through this process in days, but your competitor takes weeks to negotiate this document, you've already set the stage for how the final process will go.

When you're doing a proprietary deal, who's coming up and proposing that initial NDA?

Typically the buyer.

The buyer. Okay, but if it's a bank process, it's often the seller.

Typically the buyer. Especially if the buyer is a much bigger company than the target. It's not always the case because in some cases you have a division being spun off, then the parent. The parent target is the bigger company with their own processes, obligations and all of that. But in most of the cases where I have seen, I've been on the buying side and we have proposed our own.

Makes sense. Let's go back into the how do you negotiate NDA? What are the top three or five things that need to be negotiated?

The most controversial aspect of the document in my experience is so called residual memory clause. So that's its own separate bucket. The stuff hits the fan. Typically this is typically the last item to be resolved. But before we get there, we can knock off a few more mundane things. Mutual or one way is frequently discussed up front. Some people prefer one way. NDAs in my experience and my very firm believe that all of those NDAs should go two ways. The acquirer in the process of diligence will disclose a lot of proprietary information and the acquirer needs to be protected as well. I think it's erroneous to think that the only disclosing party is the target. And the reason is that as you go forward with the diligence and planning of what you will do with the target, the acquirer will Share a lot of information about its strategy, about its capabilities, about its gaps, what it's going to do, what it's planning to do with the target's technology, how it's going to monetize the target's technology. The deeper you go in the due diligence process, more of that stuff is disclosed. And if the target is going through a process with a number of players in the same ecosystem, you want to make sure that this information does not get leaked to the other bidder. So that's one. And by the way, it doesn't have to be simultaneous. The target could be in the process with you this year and then in the process with somebody else two years from now, or a year and a half from now. Your strategy and your strategic thinking, let alone any of your numbers leaked to another party A year from now, when you will be discussing price, you will be talking about most likely how you are thinking about realizing synergies, how you're thinking about realizing cross sell upsell opportunities. All of that stuff is highly proprietary to the acquirer and target will have exposure to it. So in my experience, in my firm belief, for the negotiations to be transparent and for due diligence to be productive, the NDA has to go two ways. The other idea we can kick off is the duration. That's super easy to find compromise, because it's an ultimate spectrum. To me, three years, what I've seen, at least in my corner of industry, three years as standard, four, five years, is sometimes on the page. I think it's kind of exceptional and I don't think it's reasonable. Things change so quickly in technology that keeping something safe for five years doesn't make any sense. What should never be done is indefinite. That's just that form. Nobody should be assuming indefinite liability and indefinite iterational obligation for any of the data. And another one that I've seen quirky and gets almost to the legal fine print is what actually is confidential information. Is it what's verbally disclosed is what's in writing. Is it what's in writing but explicitly marked confidential? The interesting, really interesting one here is is it just the primary information or the derivative work product as well? So for example, a target sends over a set of financial numbers, marks it confidential. Everybody agrees that's confidential. But then an analyst at the acquirer does some analysis, puts together some ratios, some trend lines, and presents this to the executive team in a summarized form. Is that now confidential? What are you going to do with that particular analysis when the deal falls apart? Or if the deal falls apart. Will you have to destroy it? Will you have to return it? How will you have to safekeep it? Like all of those things actually start to matter? Kind of edge cases, but a lot of Those things in NDAs have a low likelihood of being tested in court, but. But a very high or effectively unlimited in majority of the cases, exposure if a damage is proven in the court of law. So you just need to be careful on how to treat all of those things. And then another one that's negotiated probably right before the residual memory clause is non solicits, non hires, and all those things that you can and cannot do with people you encounter in the process.

You just don't want them going back to recruit and hire people. What about jurisdiction in terms of enforcing the NDA?

Now you're getting more into legal territory and legal counsel should help you with that. Most what I've seen is the buyer wants it in the territory where they're based because presumably that would be the most friendliest juries if it ever comes to litigation. But I've also seen firms be very flexible.

Okay, and then if there's a breach in the NDA in terms of ask for repercussion, is that outlined in the NDA?

It is. All I can tell you is the punishments are very steep, if not unlimited in most cases. Because once you breach, you deal with data breaches. And it's one thing if the data of one of the companies is breached, but you could also breach into the data of the customers of one of those companies. So then you get into really severe repercussions. Most of the NDAs I've seen have unlimited panels.

Is it like a lease agreement where there's like waiving your right to jury and stuff like that?

That is mostly a legal question.

That's a legal question we can always ask when you agree to arbitrators going back to residual memory. This is an interesting one because you go through, you're doing diligence on the deal and you come across trade secrets, all kinds of proprietary pii, all kinds of information. And you can memorize it. You can visually, it's in your brain, it's there. Maybe not on a hard format. How do you cover that in NDA?

Yeah, so intellectually, this is the most interesting part of the agreement. The clause where this gets discussed is the residual memory. The general concept is that once you have seen something as a human being, it's very hard for you to unsee it. Typically this refers to general frameworks and general skillsets in normal life. Think about it as learning to ride a bicycle. If the company manufactures bicycles and you've never ridden a bicycle, but you want to try it out, you can learn the skill set. You learn to ride the bicycle. It's an amazing bicycle. You cannot unlearn the skill of riding a bicycle. The same could be said about intellectual endeavors. If you're trying to solve a problem, your company, as an acquirer, your company has been trying to solve this one particular issue and then you learn of a completely new approach. It's just blows your mind. It's not what you have been doing, it's not what your advisors have been telling you. It's just complete out of the box thinking that this other company that the target came up with, and it's so simple. Because everything that's genius is simple in a way. You saw it, you have the aha moment, you can't possibly unlearn it. The residual memory stops being general skill set and becomes confidential information that should be unambiguously covered by the NDA. Is when you're discussing how is this framework is actually implemented in solving the problem. So back to our bicycle analogy. How do the gears work, how does the brake work, and so on. Is this saddle maybe slightly different the shape and what is the geometry? So once you start talking about the actual implementation of this framework to solve the problem, that's no longer residual memory. That's a very specific information that you have extracted as a company. The acquirer will always intend or will always strive to say, well, if it's residual memory, just forget it. People can't unlearn, we can't do anything about it. That should not impose any restrictions on us. The target would say it's the crux of the matter. That's why we became so successful. We developed this new amazing approach, this new amazing philosophy. If somebody has seen it, they can't be using this in any of the products you may subsequently build. If we are not acquired. Both statements have truth to them. This is where reasonable people can absolutely disagree. The operational constraint. And again, we need to look at every NDA with the lens of what operational constraints and legal liabilities this imposes on us. The operational constraint in this case for the acquirer is, is. Well, the reason we're talking to you, dear Target, is because we have the stability gap. We have been trying to solve this and if this transaction doesn't go through, we'll keep trying to solve this. And we need to have people in the organization who will do this for Us. And by the way, we have assigned the best of our engineers, the people with the most expertise about the problem on this due diligence. So if you're a small company, you just don't have anybody else. And you, as an acquirer, you can't possibly promise the target that whoever has been exposed to this due diligence will never work on solving this particular thing if the transaction doesn't go through. If you're a big company and maybe you have three different engineering leaders or product leaders who could be doing that, well, then you just imposed a whole bunch of org design restrictions on yourself. You could in theory say we send this guy Josh to, to look into your technology. Josh will never work on this problem in our company again. And you can think to yourself, it's okay, Josh is not going to work if you're going to reassign Josh to this other problem, but instead Jessica will be working on this problem and Jessica is not going to be involved in the due diligence. What happens if Jessica leaves the shop in six months? And what happens if the problem you thought you would assign Josh to is off the strategic roadmap and Josh has to go back to solving of this particular problem? You've just imposed an unsolvable and completely unnecessary set of constraints on your organization that also a whole bunch of people will forget. Because by the time now the transaction is broken off, the conversations are broken off, it goes through a couple of planning cycles by the time Josh is back to solving this problem. And by the way, that framework is still in his residual memory. The lawyers, everybody left the company a long time ago, so nobody remembers. So all of a sudden Josh is violating the NDA. If this is what you have signed.

Up to, this sounds unavoidable.

So in my experience, if the acquirer takes this NDA seriously with the due attention they need to pay to it, and the target is being unreasonable, this is where acquirer may actually walk away. This is probably the only place where I can see people walking away. The other reason is this particular clause. It's kind of hard to find a compromise again because it's residual. It's in your memory. You can't then see it. The couple of proposals I've seen over the years is something along the lines of a clause. It's residual, but only if the human did not make a deliberate attempt to memorize. And then you get into, well, what is a deliberate attempt to memorize? And that somebody understand one day we'll have to articulate, but obviously you can't take notes, you can't record the sessions, you can't copy the code. But you also can't come home. And based on your memory of what happened 12 hours ago, JOT down, you know what you remember because obviously what you remember in 12 hours is different than what you remember in 12 months. You can dance around this issue a little bit, but it's very hard to get a compromise.

Now it sounds like you're getting legalese here.

So. Yeah. So either the target is okay with this residual knowledge potentially being used in development of a competing product.

That's interesting one. It seems really tough to define.

It is very tough to define because it has to do with, with what's going on in humans heads. It's not a process.

The seller, you can't push back too hard otherwise you're going to turn the buyer off and may end up losing the deal there.

Or you may end up with a buyer who is not serious about the whole document, the whole note, which is also not good.

Yeah, yeah.

This one is a trick one.

It is. It sounds like it's almost the most important one. Everything else is a lot more cut and dry versus this area where it's like, hey, we're very much talk about intangibles.

It depends on your philosophy. If you think ideas at the high level are the most important thing in company execution, then yes, at the end of the day the way to get around it is to say, look, we understand the concept of the framework, how you solve the problem is extremely important. But at the end of the day it's all about execution. It's how you actually transform this big idea into the actual product. That is in fact very difficult as well, if not more difficult. Is it about the actual execution or is it about how monumental you should patent it to begin with? That could also be part of the discussion. If this is such a groundbreaking, earth shattering discovery, go ahead and file the patent. If you haven't filed the patent notification, why then by definition it's more about the execution. Not by definition, but you're putting a high weight on the execution of this idea compared to the idea itself. Once you have the conversation going in that direction, you know the trust is not there.

That's well put. Definitely. Ideas are a dime a dozen. Let's get into what not to do in negotiating an NDA to do it.

Prematurely, to prioritize getting the document through over the fundamental human trust issue. What you don't want to do is you don't want to win the battle and lose the war. At the end of the day, it's both parties should want to continue the diligence process if they believe there is there. So you want to get past this hurdle and you want to ensure that as the diligence and next steps in the process evolve, that both parties maintain the trust and both parties are well aware and have internalized what obligations they have taken on behalf of their companies. This is also how you know the process has been successful. If the people who will actually be doing the work understand well what kind of obligations both parties have taken on and how this impacts who they talk to, what they ask, how they physically treat the information that they receive, where they need to go back to and ask for additional advice. If people understand that and if people feel comfortable continue the conversation, then you know you've been successful. If you haven't accomplished any of that, something has gone off the rails, people.

Aligned from the beginning and comfortable.

And it's important that it's not just the lawyers are aligned. I've seen that too. I've seen the NDA process been executed in parallel to the actual diligence process. So by the time it's done, the people who are actually doing the diligence have no idea what's in the document. All they know is the document assigned and they have a green light to go ahead. So they do exactly the same thing, whether residual memory has been defined one way or a completely different way. But that should impact how they carry on.

Do you do that? Do you do that with your team, is review the NDA in layman terms and saying, hey, this is what we're agreeing to make sure everybody knows the.

Team should be involved in crafting and they should understand what exceptions have been made in this particular case. So you have, as an acquirer, where I spend most of my career, you have the general standard form, and everybody understands what in the standard form. And then if the exceptions made, then people should be aware what exceptions have been made and also super importantly, why those exceptions have been made. What is it that was so important to the other party that we had to make a structured, different approach?

Is each person executing a copy of NDA or is it one person representing the company?

Depends on the process of the company, but that's typically one sort of person driving this on the business side, supported by the legal team.

Because that's the whole thing if you think about it. A lot of times NDAs are executed, but it's not clear or communicated to others. It's just, oh, yeah, we got the NDA done?

Exactly.

It's like, okay, great, what do we agree to in that NDA?

Right. And that's extremely important. What did we agree to do with the information when it does not go through? Are we going to follow our standard process or is this process going to be a little different?

So that's what you do. You brief the team and clarify that. How long does that take you to explain what we agreed to or supposed to follow?

If you're a good communicator, it shouldn't be that long. It could also be in an email. But you want to build the awareness. The most important thing is the leader of the deal team understands what every analyst also depends how big your team is. If you're a team of one or two, which I suspect vast majority by number of those teams are, then you've been negotiating, you've been working with the lawyers, you've been working with the other side. So you know. But you need to, you need to, to understand how this translates, you need to internalize. And if you have a larger team, then other members of the team should also know the key points. Maybe best way to put it, you need to tell them what not to do in this particular case.

That's what I'm wondering. Because if you have a larger team and this residual memory falls back on a lot of this proprietary stuff, that may be more engineer to engineer conversations.

So at that point you need to brief the engineers, you need to think about who you select in your due diligence. If you have the luxury of a choice and you can pick among three different people to go and evaluate this from the technical side, the NDA should inform the logic of who actually gets to go.

Yeah, this makes a lot of sense. This reminds me in our software tool that you have those pop ups when you log into the data room environment. That, here's the NDA could be a little thing as a reminder, but then again, it's like a legal form.

Yes, this should be a factor in the decision and at the very least it should be in the briefing on the deal or on the due diligence.

So as you bring people in, you brief them.

Absolutely.

That should essentially be the kickoff checklist, basically incorporating the kickoff checklist. So that if you're using a template format and they're doing subsequent kickoffs as they're adding new teams or deploying new milestones, then you incorporate or rehash those.

Key terms from the NDA or maybe key exceptions in this NDA compared to our policy, depending on maturity of the organization and size of the team.

Anything else not to do an NDA. We talked about not being a pain in the ass negotiator, setting up the general framework for working.

The other one that gets negotiated from time to time is the non solicit and non hire clauses. Again, not a lawyer. And this is what lawyers would be super helpful. My understanding as a layperson is courts, especially in some jurisdictions have begun to look significantly more favorably on the clauses from the point of view of the employee who is changing jobs. So the courts have made the non solicit and non harris much harder to enforce. That's my understanding from very non legal layperson's point of view those clauses, smaller companies frequently ask larger companies for that. Two things to remember. One, the operational complexity that could come out of this is just incredible. The funny thing about those is the target may ask your big company acquirer, make sure that nobody from our small company gets solicited. Well, we're a big company. The process, you want to keep it confidential, we want to keep it confidential. But if you really want me to do this, I need to broadcast this to my entire recruiting organization. That will immediately lead to the outside world and that's against the spirit. So we need to keep it under wraps. We can't go out and impose across our entire organization a multi year commitment not to solicit anybody from your firm. Also, what if they reach out to us? How are we going to handle that? The other nuance to remember is this should also be mutual. If the target is not sold and target remains independent, they will have all the incentives in the world to attract the person who is doing due diligence on behalf of the bigger company. So there's both parties take risk. The risks should be shared mutually. However, the operational constraints on the bigger organization are significantly more potentially encumbersome.

Yeah, it helps to see it from that point of view. From the big large company side, when you go through a deal process, a lot of times it's just not your firm doing everything in house. You're going to recruit external teams, maybe consulting firms, Q of es, Operational diligence, integration management. How does that covered in the NDA?

Yeah, that's typically covered most of the time. The parties are defined as a company A and the representatives are covered by the same obligations. So as a larger company or as a company that invites vendors to help with that, you need to make sure that your NDA is structured similarly in terms of the obligations of data maintenance and return of confidential information. Destruction of confidential information is the same when you are disclosing and when you're receiving. And your contractors are obligated to follow the same rules as you are likely to promise to follow yourself. So that's your operational point of view. But from the point of view of the particular NDA, it's fair and it's typically done that everybody who you bringing in would be covered by exactly the same terms as you are. Now remember, if they breach, if your third party leaks this information, you're on the hook. So you will be responsible for your counterparty. And then you need to go after your third party to make sure that they indemnify you and make sure that it's they who are paying the penalty, not you. But at the end of the day you're responsible.

So key thing is to try to use the same language with your vendors as you bring them in and know that you're on the hook. They screw something up.

Your legal should know that if you are promising three years confidentiality duration, but your contractor only promised you one year of confidentiality duration, something's got to get. Maybe you do an amendment, but that's for the legal department to make sure those things are consistent.

Point being that NDA should be modified for that specific deal based on what was agreed to in the prior originating NDA for the transaction that hey, if they're used to using some template, don't use that template. You gotta actually use one that aligns with that. I think that's the key thing because sometimes you're a small org, you template everything and you're using standardized templates.

To be honest, I haven't encountered that a lot. Either bringing on third party mass or you're having to do this dance and getting things synchronized. Maybe that happens. I just haven't worked in those situations.

You haven't done many deals in the lower middle market there, Mark, have you? Think like private company. Private company when you're dealing with just lower middle market. Yeah, some of the sophistication winds down a little bit. What about if the disclosure restrictions are too high? Do you walk away from the deal?

Clarify disclosure restrictions.

So I guess it's the other way around. If they have restrictions on information they can disclose. If it's like too high, let's back this up a little bit. Let's say you're in a scenario, you're negotiating and you have a direct competitor and you're very sensitive about the customer information. And that's something that you're limiting, restricting the disclosure around the customer information.

Right.

You know, does is that something that could deter the buyer completely from their interest in the deal?

Occupational constraints on how due diligence is done should never cause people to walk away. What you have described seems like an imminent opportunity to get creative with the process to figure out what specific information is. Just how old is this information? Can you discuss what you already know? There's a lot of room for maneuvers in the scenario you described. And this is a great example of how those parties will work together in the subsequent months of diligence. Will they get creative to accommodate the concerns? And what are exactly the concerns? What is it exactly that people are trying to prevent other people's eyes on? Is it the product? Is it pricing? Is it identity? Is that the contact information of B2B?

I don't want you to know who my customers are.

Mark.

I know you're interested in our company, but I'm not going to tell you.

So anonymize the customers, right? So make it customers. 1, 2, 3, 4, 5, 6.

Okay. That's enough for you to do your diligence.

We can work together and creatively find the solution. How? You can tell me the degree of your business without disclosing the actual names of your customers. If this is what concerns you, this.

Lends back to the prior thesis that lays down the groundworks for how you're going to work together through the rest of the deal.

Exactly. And most of the how will you do the diligence? How will you structure? How accommodating and problem solving will you get when you actually do the final documents?

Any tips, advice? What do you think makes NDA successful?

Approach this from the point of view of this is an exercise of being accommodating, being in the problem solving mode, laying the foundation of how we will treat each other going forward. There are very few things in in disagreement that should cause parties to walk away. All of it should be imminently solvable. Residual memory may be one in some circumstances rare, but this is the one where I've seen people being on the brink. Everything else should be imminently solvable. The complexity and the number of the issues discussed at NDA is a tiny fraction of what these companies will encounter as the deal moves forward. So if you can't solve that and you walk away, maybe just take yourself six months of hard work and blood, sweat and tear in the future. Because if you can't negotiate NDA, you probably won't be able to negotiate a 300 page closing binder.

What about the experience? Have you seen any tools that Help this process go better?

No, I have not. Other than the usual legal tools, maybe.

Sending over a DocuSign versus a PDF to sign. I don't know.

No, I haven't seen anything. I haven't seen a database of standard terms or by definition this agreement confidential. So I can't think of any. I guess the best tool is call your lawyer because they do it presumably day in day out, especially outside counsel. So they've seen by definition way more than you on the commercial side have seen. But no, I have not seen any tools.

I feel like that's what our industry needs is like a more of these builder type of products where like here we have a series of terms that either include or not include in the NDA but to be able to see a series of examples that go in different directions and build off of that template per clause because you always have one template across the whole document but not so much a little variety to build one out.

The best thing I've seen to be honest is an NDA with 10 footnotes for internal use only that explain for each of the footnotes. This is the term, this is the reason. This is what we're willing to do. These are a couple of creative approaches if your counterparty feels a certain way and the residual memory clause page by page. But everything else is okay. The jurisdiction is California because we're in California. But Delaware is okay if it's a different jurisdiction. Try to push back but don't walk away kind of thing.

Those were damn good lawyers do.

These are your large corporate legal departments. Great exercise for.

Yeah, I guess on our end we don't see most of the internal markups.

You need to get them updated. Market conditions change. Who has the negotiating power is a big consideration here. Is it a buyer's market or is it a seller's market? Is that a competitive process where you know there are three other bidders and it's a must have technology that you really don't want your competitor to have. Or is this an acqui hire where the company is running out of cash and they have no customers and they have super interesting technology and 20 engineers. It's a very different negotiating dynamic based on the actual commercial consideration of the negotiating power.

This is really good insight on NDAs. I feel so much more knowledgeable. Mark, what's the craziest thing you've seen in M and A?

I've seen a chase. I've seen a real chase where over a period of a decade and I've only been with this company for Much shorter than this. Like clockwork. Every couple of years the acquirer approached the target and. And every two years offered twice the amount of the two years before. And the response, the ask was always double that. So it went from 2 and 4 to 4 and 8 to 8 and 16 and it just kept going on clockwork. Every two years, double every time. It was hilarious. You could take bets. I've seen that.

How long did it end at all?

They are not together.

Oh my God. Oh my God.

Still two separate companies.

Wow. That's funny. That's funny.

People could take bets.

There's a banker that might be able to hash that deal out. With the right model, you just gotta.

I'm sure if they approach well, I haven't been involved in that particular dynamic for a few years and I know they're still independent obviously, but I'm sure if one approach the other, the response would be the same. We'll give you x though it's 2x.

That's funny. That's what I was saying. They're not agreeing on the metrics to look at that or define what's market. Mark, thank you so much for your time today. I enjoyed this conversation.

Absolutely. Thank you. Thanks for having me.

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