Should You Send a Non-Disclosure Agreement to Potential Investors?

By Fernando Berrocal

Is it a good idea to have potential investors sign a Non-Disclosure Agreement (NDA) before pitching your startup? No. It’s virtually never a good idea to urge a potential investor to sign an NDA. Issuing this would almost always hurt your prospects of getting funded and make you appear foolish. Let's take a look at why that is.

Should investors sign Non-Disclosure Agreement (NDA)

What is a Non-Disclosure Agreement (NDA)? An NDA is a legally binding agreement between you and another party to maintain confidentiality. Businesses utilize NDAs while negotiating with one another. Employees and contractors are frequently required to sign NDAs by businesses.

The NDA spells out what kinds of information you're not allowed to share with others. It also notes, "If you break the rules, we can sue you." During discussions, the parties may sign a mutual NDA, in which each agrees not to reveal information about the negotiations with outsiders.

Why do people sign NDAs? Because it prevents the signee(s) from gaining an unfair advantage by exploiting sensitive information. For instance, a larger organization is interested in purchasing your business. You have access to private financial information during talks. You might now take that knowledge and trade it for a better acquisition agreement with one of their competitors. However, because of the NDA, the first business will be entitled to sue you.

If you signed an NDA with your business as an employee, it's because you may learn information they don't want competitors to know. Examples of this information being their marketing strategy, their technology, or their quarterly financial reports.

Why do Startups send potential investors NDAs? Some entrepreneurs are concerned that their secret sauce formula may be leaked. They believe that if they share the specifications of their product with a Venture Capitalist (VC), the firm would either share the knowledge with others or create their own (Cloned Business). Fortunately, with established investors, this is quite uncommon.

Why don't potential investors sign NDAs? There are several reasons why potential investors would refuse to sign an NDA:

  1. It Would Cause Too Much Hassle: Any established VC ready to meet with you is very certainly meeting with similar startups. They'd be in a huge legal mess if they signed an NDA with every founder they met. Plus, for an investor who receives 1,000 presentations yearly, reading, signing, and tracking each one would cost a lot in legal expenses. It's simply not worth it.

  1. Your Concept Isn't Unique: Aside from the difficulty, the true reason potential investors won't sign NDAs is that your idea isn't unique. You put resources into establishing your product concept. Nobody is claiming that this is a terrible thing but the execution is what investors want to see. They're likely to invest in you because they believe you have what it takes to get your product to market, outmaneuver rivals, and seize opportunities. Keep in mind that they're probably already talking with businesses that provide identical goods. They're not only investing in your goods; they're also investing in you.

  1. You're Not Going to Sue Them: NDAs are notorious for being difficult to enforce. To do so, you'll have to show in court that the investor in the issue stole your concept. That's difficult to accomplish since there are so many comparable product concepts. Most NDAs are more symbolic than practical, sending the message that you're serious about protecting your Intellectual Property (IP) and laying the basis for what can and cannot be revealed.

Send a Non-Disclosure Agreement (NDA) to Potential Investors

Sending an NDA to a Potential Investor makes you look bad: But surely there's no harm in sending an NDA, you would think. After all, they can always refuse to sign it. Wrong! Sending an NDA is harmful to your cause for two reasons:

  1. It makes you look Inexperienced: Investors prefer to invest in entrepreneurs who know what they're doing. Because of the reasons stated above, it is uncommon for VC's and other potential investors to sign NDAs. Sending an NDA gives the message that you don't know what you're doing and that working with you isn't worth it. Remember that VC's meet hundreds of entrepreneurs yearly, so it's simple for them to pass you up and go on to the next one.

  1. It sets a Bad Precedent in Terms of Trust: The fact is that any VC or Angel Investor who went about stealing ideas and backstabbing founders who presented to them would not live long.  When you ask a potential investor to sign an NDA, though, you're implying that you don't trust them. You're arguing that no matter how good a reputation they've established, you still don't trust them not to reveal your secrets. This can make you a difficult person to work with.

When you absolutely must sign an NDA with a Potential Investor: It's unlikely that you'll ever need to sign an NDA with a potential investor. If you're discussing highly technical, private material that may be duplicated, there is one exception. Sending an NDA to a potential investor makes sense if you're working in a highly technical field where your organization's success is dependent on real scientific discovery. You can't afford to reveal your secrets when you're working on the future of quantum computing or space travel.

Most startups, though, aren't building that level of technology. Rather than the technical details, investors are more interested in how you're going to execute the concept and beat your competition.

How to fundraise without signing an NDA and yet still be protected: Even if it's common practice to pitch potential investors without issuing an NDA, and providing an NDA sends the incorrect impression, going in without protection has its risks. You can find yourself in a meeting with an unscrupulous, fly-by-night investor who is out to steal your ideas. Even if the business you're presenting to has a strong reputation, an untrustworthy intern might disclose your information to their connections. Here are several options for self-defense:

  • Only provide information that you are comfortable with others knowing about.
  • Do your homework on potential investors ahead of time.
  • Put a watermark on your deck.
  • Recognize when you’re being stolen from.

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