Sup­pose a prospec­tive client approaches you to do work for hire. In many con­tracts for tech­ni­cal work, there will also be a req­ui­site nondis­clo­sure agree­ment (NDA), which may be uni­lat­eral or bilat­eral, but which in either case spec­i­fies that you (the con­trac­tor) will keep secret cer­tain infor­ma­tion regard­ing the client and contract.

Lack­ing such a nondis­clo­sure agree­ment, it’s com­monly under­stood that you could when­ever you wish dis­close what­ever infor­ma­tion you like about the name of the client, the nature of the work pro­posed or done, or even trade secrets you learned in the course of the con­ver­sa­tion. Depend­ing on the char­ac­ter and val­ues of the client, one or more of those facts will prob­a­bly be sub­ject to nondis­clo­sure clauses in the con­tract they want you to sign. And those clauses may (if you’re not thought­ful or care­ful) have no expi­ra­tion date.

I’m think­ing of one for­mer client—a large Mid­west­ern corn hybridizer—who made us sign an indef­i­nite nondis­clo­sure agree­ment that promised we would never state the name of the com­pany. That’s it; just the name.

At any rate, let’s look for a moment at what you’re signing.

As we under­stand the law, until you sign that con­tract you pos­sess the option to dis­close what­ever you want, at any time you want. Within cer­tain extreme lim­its (libel, slan­der, state secrets, and so forth).

Let’s give you the ben­e­fit of the doubt as a con­trac­tor, and assume you’re not inter­ested in reveal­ing the pre-​​existing trade secrets of your client. Let’s just say you shouldn’t ever do that, and that they have a clear right to keep you from doing that before any are revealed to you, and that there­fore the deal is bro­ken if you demand the abil­ity to tell any­body anything.

But com­mon nondis­clo­sure lan­guage also cov­ers the broad range of knowl­edge and infor­ma­tion that arise dur­ing the course of the project: not just the stuff you make together, but the name of the client, the terms of the con­tract, the out­come of the project… all kinds of new infor­ma­tion that many clients would like to keep you from pass­ing along.

What is the value of that option to speak about your col­lab­o­ra­tion with one another? Finan­cially, I mean?

Well, the value to you might be sub­stan­tial, espe­cially in the cur­rent busi­ness cul­ture: Assum­ing you’re a con­sul­tant, con­trac­tor, advi­sor, or other non­em­ployer firm, the rel­a­tive mar­ket­ing value of adding this infor­ma­tion to your pub­lic port­fo­lio of work may be huge, depend­ing on the nature of the client and work. If you had com­pleted con­tract work with­out the bur­den of the NDA, you would have the option to brag about the name of the client, the nature of the work, the details of the tools and cun­ning solu­tions you brought to bear, the amount you were paid… all inar­guably use­ful infor­ma­tion to trot out the next time you’re speak­ing with a sim­i­lar client.

Lack­ing the abil­ity to share any of that infor­ma­tion, as an indi­vid­ual con­trac­tor or con­sul­tant, you have inar­guably lim­ited your abil­ity to mar­ket your­self. Who did you work with? Can’t say. What did you do? Can’t say.… And (again, give the cur­rent busi­ness cul­ture) that mar­ket­ing value is not dimin­ished even if the project was a total tech­ni­cal fail­ure. So from the side of the con­sul­tant, it’s clear the abil­ity to pro­mote one’s own exper­tise has pos­i­tive value.

Now sup­pose you do sign an NDA that restricts your abil­ity to pass along this infor­ma­tion for one year. In real options terms, it seems that you’re post­pon­ing the exer­cise of your implicit right to mar­ket your busi­ness. In exchange for com­pen­sa­tion, of course: the pay­ment you receive from the client, and what­ever gen­eral knowl­edge and expe­ri­ence might be accrued dur­ing the course of the project.

So at this point it seems that the amount you should charge the client just to sign an NDA depends on the expected loss of rev­enue you will expe­ri­ence from lim­i­ta­tions of your abil­ity to mar­ket your work. If we pare away the deci­sion to work on the project together, we can­not get looped into ridicu­lous conun­drums like, “Well, if you don’t sign the NDA we aren’t going to have a con­tract.” The value of the NDA is not the value of the entire con­tract; the work you do for the client is what causes them to pay you.

The NDA’s value must be separable.

But there’s where I get hung up, some­how, so I keep mulling it over look­ing for a way to model the trans­ac­tion that cap­tures the risks and ben­e­fits of dis­clo­sure and nondis­clo­sure so they can be made more explicit. Maybe because in this com­bined deal (contract-​​plus-​​NDA) there is also a set of com­plex options being cre­ated, sold and exer­cised by the client, I admit I get tied up.

I’m encour­aged, though. Con­sider that a well-​​formed con­tract for work is above all an aid to the plan­ning processes for both par­tic­i­pants, in that it reduces the uncer­tainty regard­ing pos­si­ble out­comes. As a con­tracted worker, you have more assur­ance of income in the near future; as a con­tracted client, you have more assur­ance that the project will pro­ceed, and you have a bet­ter han­dle on the costs.

Still, the value of nondis­clo­sure within one of these con­tracts feels com­pli­cated, though not nec­es­sar­ily from the stand­point of the con­trac­tor. What are the sources of value and uncer­tainty on the client’s side of this plan­ning process?

Surely the client believes that by engag­ing you and apply­ing your exper­tise and effort there will be pos­i­tive busi­ness value com­pared to what they would achieve with­out your par­tic­i­pa­tion. Or per­haps your pres­ence reduces the risk of fail­ure by a detectable amount. In any case, let’s limit the scope of the analy­sis by assum­ing there is a clear-​​cut case in terms of risk and return for them to engage you.

But they clearly also believe—whether or not it’s true—that pub­lic dis­clo­sure of cer­tain infor­ma­tion will put them at a com­pet­i­tive dis­ad­van­tage. As if you didn’t know it already, this is the assump­tion I’m most prone to chal­lenge. It’s clearly the rea­son cur­rent prac­tice so often makes nondis­clo­sure a deal­breaker: it’s com­mon knowl­edge that the rev­e­la­tion of trade secrets is expensive.

Now I con­fess there is a ten­dency among those of us who have been entre­pre­neurs or ana­lysts or mod­el­ers or IT pro­fes­sion­als or experts of any sort who type and draw on white­boards a lot to imag­ine that the sort of trade secrets that a client might want to pro­tect are the same kind of sim­ple inno­va­tion that we cre­ate almost every day: bet­ter soft­ware, work­ing ana­lyt­ics, cun­ning and insight­ful reports, graphic designs, improve­ments in insti­tu­tional struc­ture. Insights, call ‘em.

These “secrets” are the kind of thing we joke about around here by say­ing (quite accu­rately), “A good idea is born worth minus $25000.” Because ideas are cheap to for­mu­late, but each one has real costs to imple­ment. Over the course of a decade one inevitably hears the same idea pitched a dozen times in whis­pered tones as if it were made of gold: a real estate aggre­ga­tor, a stock pre­dic­tion sys­tem, a social site for book lovers, a killer app on the iPhone.…

These are, in my expe­ri­ence, the most com­mon kind of client projects: the sort any mod­er­ately smart pro­fes­sor or middle-​​manager or grad­u­ate stu­dent stum­bles across in the course of their “real work”, sees unbounded upside poten­tial of, and (with­out explor­ing the prac­ti­cal­i­ties) pur­sues opti­misti­cally. And thus tends inevitably to over­value.

In the case of such triv­ial secrets, let’s assume that the client’s model of the risks from dis­clo­sure of their “secret” greatly over­es­ti­mates the chances or the losses, or both. Your model, or per­haps “the market’s” model, would pro­duce a much lower risk for the client, and there­fore a lower price for [non]disclosure.

But as an expert con­tribut­ing skills to com­plet­ing the project, the abil­ity to pro­mote the sort of work you are brought in to do is no less valu­able to you—inde­pen­dent of its valid­ity as a “secret”. You write, you type, you answer ques­tions, you con­tribute insights whether they are build­ing a hugely inno­v­a­tive first-​​mover, or a bog-​​standard also-​​ran.

So it strikes me that the prob­lem in these cases lies with the qual­ity of the client’s mod­els of their intel­lec­tual prop­erty and com­pet­i­tive land­scape. They over­es­ti­mate the recov­er­able value (or under­es­ti­mate risks) asso­ci­ated with the project, and as a result the real­iz­able long-​​term value to them of keep­ing the secret appears to be greater than the imme­di­ate value to you—and to them—of pro­mot­ing the work.

Because we shouldn’t dis­re­gard a qual­i­ta­tively dif­fer­ent model of the con­tract: Sup­pose instead of being client and cus­tomer you are part­ners, and you are faced with the deci­sion whether to pro­mote your project or keep it secret together. There is mar­ket­ing value to both of you, but also risk from com­pe­ti­tion to both of you upon dis­clo­sure. And dis­clo­sure is irre­versible, don’t forget.

So from a real options per­spec­tive if you can post­pone the deci­sion to dis­close until the ben­e­fits of pro­mo­tion def­i­nitely out­weigh the risks of com­pe­ti­tion, you both win. Whether you’re part­ners, or con­sul­tant and client.

Hope­fully you can see the same real options struc­ture I do. At some point, if they’re pay­ing atten­tion, the client will even­tu­ally improve their model of the real value of their “secret infor­ma­tion.” We just don’t know when that will be, exter­nal­i­ties and uncer­tain­ties of life being what they are.

So sup­pose you enter into a suite of sim­ple options con­tracts regard­ing dis­clo­sure in which (a) you cede your right to dis­close the infor­ma­tion for a fixed length of time (say a year) in exchange for a cer­tain sum of money to off­set your lost mar­ket­ing value; (b) your client is granted an option to renew that con­tract for another year at its end; and © your client is granted an option to aban­don the entire nondis­clo­sure struc­ture (includ­ing sched­uled pay­ments) at any time. They should exer­cise this option, obvi­ously, when they’re out of the money: when the costs they will be pay­ing in future out­weigh the real­iz­able ben­e­fits given new information.

What is the price for nondis­clo­sure, here? It can be esti­mated as the loss of rev­enue you as con­trac­tor will expe­ri­ence from fail­ure to mar­ket your­self. If your client receives new infor­ma­tion at any time that reduces the per­ceived value of secrecy to the point it no longer seems to be worth pay­ing you for it, they can aban­don the agree­ment and your right to irre­versibly dis­close the infor­ma­tion reverts to you. If at the end of a con­tract period they still per­ceive pos­i­tive value in secrecy, they may renew (per­haps at a new price).

Now it’s been pointed out to me that there’s more than just this sort of “naive secrecy” I’ve sketched. While it’s com­mon in star­tups and small busi­nesses, a larger or more capa­ble client prob­a­bly has bet­ter mod­els of the risks and val­ues of dis­clo­sure. If noth­ing else, larger firms are more likely to be aware of real com­pet­i­tive land­scapes and best prac­tices, and tend to out­source devel­op­ment as opposed to research projects.

The secrets in these cases are not so much inno­va­tions as they are well-​​defined func­tional prac­tices and infor­ma­tion that’s been tried and tested. In many cases there are smart account­ing mod­els of exactly how much they’re worth.

But I don’t see how this neg­a­tively affects the cal­cu­la­tion of the cost of secrecy. Indeed, it should improve mat­ters and sim­plify for all involved if the com­po­nents of the con­tract regard­ing secrecy are sep­a­rate from those regard­ing work-​​for-​​hire. Give the cus­tomer the ben­e­fit of the doubt here, and assume we’re now at the oppo­site extreme from “naive secrecy”: now the least accu­rate pre­dic­tive model is prob­a­bly the contractor’s, in that it over­es­ti­mates the value of mar­ket­ing (disclosure).

What we do in this sit­u­a­tion? I’m not sure.

And uncer­tainty is the key: that’s what real options pric­ing is all about. So maybe (after I think about it for a while) we can work the rest of the model out, and maybe slap some prob­a­bil­i­ties and prices on there.

In gen­eral, here’s where I feel like I am: The pres­ence or absence of an NDA clause in a con­tract should not mate­ri­ally affect the expected cost of the actual work per­formed, and there­fore it can be sep­a­rated away from the work-​​for-​​hire clauses. Fur­ther, the mat­ter of dis­clo­sure of pre-​​existing trade secrets (in either direc­tion) is not what I’m think­ing about here, and that should be sep­a­rated as well; I’m talk­ing about novel infor­ma­tion mate­r­ial to one par­tic­u­lar project, rang­ing from the exis­tence of the project, to state­ments of the goals of the project, to descrip­tions of the par­tic­u­lar tech­niques applied, to news of the even­tual outcome.

This infor­ma­tion would be of value to the con­trac­tor (and arguably the client, but we’ll ignore that) for mar­ket­ing pur­poses, who there­fore expects a finan­cial advan­tage when it is dis­closed. But the infor­ma­tion is also (arguably) of value to com­peti­tors of the client, who there­fore expects a finan­cial cost should it be disclosed.

There is uncer­tainty asso­ci­ated with all these val­u­a­tions, and with the prob­a­bil­i­ties of the events occur­ring. How do we model that in such a way as to make it sim­pler to sep­a­rate agree­ments for work from agree­ments regard­ing nondisclosure?

It’s sim­ple refac­tor­ing, really: The mod­ules have very dif­fer­ent func­tions, and yet they’re too often interconnected.