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.
Why is it an abuse? It's business. Somebody can sugar coat and treat someone nicely (not be a dick) but in the end they are going to do what is in their best interest. Everyone does this. (I'm not claiming that some people aren't manipulative or more of an asshole than others.)
From the story:
"but given our waning cash reserves we felt like putting our eggs in this basket and creating a trusting relationship would increase the likelihood the deal would happen"
Naive. They took a chance and bet wrong. If you've been doing business long enough you would realize that a trusting relationship will not trump self interest. And any legal document doesn't mean anything if you don't have the resources to enforce it if the other side wants to get out of it.
"We are a company without the cash to try to enforce the NDA, and The Company knows it since they saw our financials during due diligence."
So they knew they didn't have enough money to enforce the agreement and they knew the acquirer knew that but yet they thought that it wouldn't be possible to have that used against them? That's naive as well.
Additionlly, everyone is assuming that they did steal info and that is a proven fact. It is not a fact. As of the writing of the story nothing has been built and there is no violation. We don't know if the company that "screwed them" ever did anything at all or if there was any abuse. Even if this went to trial (assuming funds were available) there isn't enough info in the story to even begin to make a judgment on who is right here and who is wrong. Companies always have disagreements and things get drawn out legally because each side thinks it is right. Nobody is looking to throw money out the window on clear cut legal cases. Two sides always see things differently.
When you say "violating an NDA" the NDA has not been violated. We have one side of a story. Given the facts this could be abuse or maybe not.
That leads to stuff like "we'll discuss at the next scheduled board meeting". I don't know practices for this space, but a CEO can convey a meeting on a conference call for something he wants. Once they know they can wait that long, they'll think about whether they really want this -- the excitement cools down, they see other options, they move on.
People are asking how buyers can sense they're in control. One chief thing is the seller's neglect of their own inconvenient but reasonable interests. If a seller is making unreciprocated compromises of their interests to make things easier for the buyer, that says a lot.
This seems perverse, but I'm guessing that there's some kind of economic intuition these guys have gained from being around deals all the time? Something like, "Wants a deal == needs it == a bad investment." This just seems to confirm that the best way to get money thrown at you is to not have a need for it.
Law of the jungle: If it runs, chase it. If chased, run.
Sure if you maintain that strong stance. But you can always change your level of interest and the opposite party will sense that and run to fix the deal. It's a game of chicken at that point but here's the thing. The acquirer is only looking at you and has decided they want what you have. If they didn't they wouldn't be attempting the acquisition.
So look as eager as you want. And then stop being prompt and act as if something else is going on and watch and see what happens. The investment banker doesn't want to loose a deal.
The reason being that people tend to wonder why it is that you want it so bad, and they tend to assume that's because you can't get anyone else to acquire/go out with/hire you.
That smell thing is really important.
Essentially anytime you are dealing with someone who does more of a particular transaction or negotiation than you do they will be able to sense and pickup things that you would never think of because of the quantity and quality of patterns they've experienced in the past.
We find this happens all the time with domain sales. Buyers say and do all the wrong things which cause a seller to be able to get the most for a particular domain name. I've seen it also happen in real estate as well as other negotiations (buying cars as another example).
It's hard for the less experienced person on one side of a transaction to avoid this since they don't know the signals they are setting off.
Similar logic applies to contact negotiations. Which sucks, because being fully diligent is can also set the "hard to work with" bit and kill the deal too.
It's likely that the best way to handle this is the simplest: renice the M&A conversation down to 19 or 20, beneath everything else you're doing; be legitimately annoying to work with, conveying the impression that you don't need the deal because it's the truth.
Very true. Of course if a party makes this mistake they can easily put the fear of god in the other party by changing their pattern of response.
If you tend to reply in a quick fashion and appear very eager and then all the sudden there is radio silence the other side will intuitively know something is wrong. (Ever have that happen with dating where the girl all the sudden doesn't respond as quickly and you know something is up..)
The mistake that most sellers make is assuming that someone's eagerness is locked in. That a party doesn't change their mind or doesn't have another circumstance come up that makes a sale unlikely at any price. (Similar to what the OP was saying.)
No deal is done until the fat lady sings.
The domain in the example I gave I recognized would have no other buyers essentially. So I advised to close the deal as quickly as possible even though a little money was left on the table. But many sellers simply won't take that advice they are gamblers.
Here's an example that is playing out right now.
Name offered for $6000. No other buyer for this name. If it doesn't sell it will probably never sell for 10 years.
First offer from buyer:
"Thank you for that. I could do $1200, but that is not really in his ballpark. If he changes his mind, please let me know. You are welcome to take that offer to him."
What he did right: Made offer and made it seem like that's pretty much the range he will pay. "If he changes his mind let me know" as if he is going away. So a seller would think he can probably get $2500 out of this type of guy maybe for this name. (Nobody ever makes the first offer the best offer.)
What he did wrong:
No time frame to transaction. No sense on the sellers part that he could loose the deal. No sense that other names are even being considered (even though that's normally bs and can backfire).
Reply from seller:
(A short sales spiel showing why others would want the name) ending in "he might do $4000 but I have to clear that...".
Reply from buyer:
"Please ask him about how low he will go. I will see if I can get there."
What he did wrong: He essentially didn't barf at the $4000 for the name. He gave no kickback. So seller knows he can get that amount most likely. And maybe more.
"Ok I will find out" (or something to that effect).
Buyer writes back quickly again:
"I am feeling pretty good about that. I think we can do it or very close to that."
Somewhat good: "I think we can do it or very close to that".
That essentially says he will pay the price but he gave himself a little wiggle room.
Bad: He replied to quickly to the email showing he was very eager. Time and tempo are important.
Then he writes back again a minute later to say he is ok with the escrow company and will write back soon. So he completely telegraphed his intentions. Even though he hasn't really agreed to purchase.
By the way this was a lawyer as a buyer. And this is the same stuff that happens with 6 figure domain sales as well.
So the deal right now is going to happen at $4000. The seller is fine with that price and doesn't want to loose the deal for fear he will get nothing.
In this case the buyer overpaid if he handled it correctly he could have had this name for $1500 about.
And as mentioned multiply by 10 and the same stuff happens.
1. It's not unknown for acquisition deals to get put on the back burner for a while, even a year or two. That happened to my former company when it was acquired. (This history was publicly disclosed in my company's proxy filing with the SEC .)
2. The Company's lawyers are likely to tell them, forcefully, to be very careful about trying to redevelop the technology, precisely because of the NDA.
Suppose that The Company didn't use completely different people (a "clean room" approach) to redevelop the technology. In that case, a jury might not believe they really did it independently.
In a somewhat-similar situation in the mid-1990s, Rockwell International got tagged by a jury for almost $58 million for breach of an NDA with a small start-up company concerning circuitry for improving data transmission rates over analog cell phones. (Disclosure: I was co-counsel for Rockwell at the trial.) 
(To be sure, The Company's engineers and executives might well convince themselves that they really did redevelop the technology independently, without using the start-up's confidential information. That could make it difficult to settle the case: The important decision makers might sincerely believe The Company didn't do anything wrong.)
 Celeritas v. Rockwell, http://www.ll.georgetown.edu/federal/judicial/fed/opinions/9...
Or at least that threat WRT employees unwise enough to have signed non-competes (Boston and D.C. areas, obviously not California) has killed several situations I've been in where a company failed and dog in the manger types, the very ones responsible for the failure, used such threats that everyone else gave up and the concept and/or technology died a hard death.
I seriously doubt it.
> In a somewhat-similar situation in the mid-1990s, Rockwell International got tagged by a jury for almost $58 million for breach of an NDA concerning circuitry for improving data transmission rates over analog cell phones.
What fraction of revenue was that? For a semi firm, that sounds like small-cost-of-doing-business when compared to cell-phone revenues.
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.)
Then why disclose your trade secrets under such terms in the first place?
On busy streets, I sometimes see an attitude amongst pedestrians, who like to casually jump in front of cars as soon as their light turns green. Their thinking is that they have the right to cross. There's a sense that drivers are under pressure by law to keep you safe, otherwise they'll be in trouble and people tend to mistake that as some sort of immunisation against accidents.
But what if you get hit? Is the law going to give you back your legs?
I think the valuable lesson here is that, even if the law protects you and provided you can afford it, there's no substitute for prudence.
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.
Maybe I've just been exposed to a weird sample, but I've heard 'we can do it ourselves' at least a half-dozen times over my career and not once has anyone actually done it themselves.
It turns out that's an intelligence test: Anybody worth having a gentlemen's agreement with would be gentlemenly enough to put it down in writing.
The correct answer is: Put it in writing.
Edit: NDA's are another intelligence test btw. All of the entanglements without any of the enforceability.
When you're dealing with lying buggers though, it represents an option to sue. Insurance is similar.
ie, they'll work for a percentage of any payout.
If your opponent is rich, they can hire an army of lawyers, and you'll generally need a correspondingly huge law firm prepared to invest their own time and money in countering that. The kind of law firms we're talking about are both few in number, and generally fully-engaged by well-paying clients -- clients like your rich opponent. The incentive to take on a case like this is pretty limited.
My favourite snippits are: "We shipped some amazing new products" and "Our systems handle load today that they wouldn’t project to have until 5 years from now, all on a minuscule startup budget". Shipping is easy. Selling is hard. And building something that scales to (optimistic) 5-year (!) projects seems like premature optimsation to me.
The article didn't say whether the other company actually did try to copy it, which is why "It doesn't look so hard, we can build it ourselves" is at least a little ambiguous -- especially because it's unlikely that's a direct quote (might "can" have been "could"?).
Big company says thanks but no thanks. We all get laid off by the start up at lunch time. That afternoon our company lets it be known that they'll be filing a law suit asking for damages of a billion dollars (a similar company had recently sold for several hundred million and it was the dotcom boom days - a billion sounded not entirely insane).
Big company has a change of heart late that night and decides to buy us for tens of millions of dollars. People called and told to come in to the office in the morning - the day had been saved!
The next morning everyone was fired by big company and the little startup was shut down. Ooops.
Sounds like the big company really didn't want to buy and that was the definitive end of the startup, but after the threat of the lawsuit either someone got paid 8 figures presumably to avoid the lawsuit or the big company reneged on the payment, at which point no one is any worse off.
The conclusion in the last paragraph of the (highly enjoyable, btw) story goes in this direction, but it's a bit optimistic: the real lesson learned is this: get your business to a level of success where you don’t care if the deal falls through. Get profitable. Get such amazing user growth you have investors begging to put in money. Well, I wish it was that easy!
Hint: This is when you say I can do that for X months in exchange for Y breakup fee if this deal falls though.
PS: You can still increase Breakup fee's later in the process, but this is little reason to stop talking to stop considering other offers without being paid to do so.
There's some confusion about the NDA, but as far as I can see... The Company didn't disclose to anyone.
It broke down in due diligence which could just mean that The Company looked at their financials, and found that they were a lot weaker than first presumed and thus not a good acquisition. I'm not sure they admitted that they weren't profitable (who does really?), so it might have been presumed that if you have X products, and Y infrastructure then you must have Z sales behind it. When they looked at the financials, they didn't see the sales figure they wanted so bailed.
As part of due diligence, they want to know what the secret recipe is. After all, you'd hate to find out one of the special herbs and spices is cocaine or arsenic. This is fine because MegaCorp signed an NDA.
MegaCorp breaks off the deal. Their chefs decide that they can make their own chicken. After all it's not hard to combine these nine herbs and spices.
The chefs only have this knowledge because you revealed your trade secrets under the protection of an NDA. They're not white box reverse engineering the recipe.
In this case, naming The Company would actually be less helpful, not more. If you go into a deal thinking "hey, I can trust these guys; they're not like those louts from ACME Crockpots Inc. that I read about," then you're setting yourself up for trouble. Much better to approach an acquisition deal thinking that these guys might be 'The Company', and taking precautions accordingly.
I've many a large company M&A scuttled due to NIH syndrome from engineering. And almost always they massively underestimated the effort needed to build something (including whether they had the talent or not).
I know of atleast one case where it has resulted in long term serious strategic harm for BigCo when they refused to do a small acquisition (single digit seven figures) because of exactly this scenario.
OTOH, there also tends to be a vast underestimate on how difficult it will be to integrate an existing product (even if it is already built) into a new company.
It is extremely rare that a product the company is acquiring for is exactly the product they need, it is usually 90% of the product they need, and they're still going to have to get the second 90% done while simultaneously working on all the culture issues that pop up when trying to bring two companies together.
OK, I understand that model and I can see the sense in it, but does it not set up a situation where the start-up is so dependent on some one buying them up that they can get over keen once potential buyers circle, resulting in them becoming vulnerable to the iffy behaviour of bigger businesses.
Seems to be a critical point in the business, where the founders can run in to trouble, for reasonable human reasons. Perhaps some sort of help is required in this area?
The best defense is to build a technology that isn't cheap to reproduce. There is no better moat than killer IP.
Actually that's the single worst defense. What can possibly be so expensive to produce that it can't be cloned, yet cheap enough to be possible to sell with profit? The fact of the matter is that most software is quite simple, and when it solves a particular problem in an innovative way, there is no way to capitalize on that because there's no way to enforce exclusive use (give or take a few counterexamples left or right, like a super special secret server-side recommendation algo or something like that, but those are outliers).
It's excruciatingly hard to get funding if you do come up with that sort of idea, because the experts all say its impossible. ;)
Don't forget the third part, which is what the author described, i.e. "not very smart people say they can easily do it themselves". They do not have to be able to do it, they just have to be able to convince the CEO to spend $1 million in salary on the internal delivery time to try to do it.
They're not naming names because they value the lesson more than the temporary shaming.
This story could have been written about GO's negotiations with Microsoft almost 2 decades ago. When MS shined-on GO their lead in the tablet market, and many, many jobs, were lost.
We must remember that large Corporations are looking out for their own interests in ALL cases, recognize when they would benefit by putting us little guys out of business, and act accordingly. If they won't buy us without a detailed look at our IP so be it.