Let us imagine for a second that you were a loan manager at a well-respected bank. A trusted business partner, Maria, calls you.
Maria: “I would appreciate it if you could meet with my friends and loan them some money to buy a building. It is an excellent building, in a great neighborhood, but my friend is worried about people hearing of its availability. But if you will sign a NDA, promising never to discuss the building or the block the building is on, they will be happy to meet with you and discuss you loaning them money.”
I think we can all agree that it is a silly ask and that no loan officer in their right mind would take such a meeting.
But early-stage entrepreneurs routinely ask investors to sign non disclosure agreements (NDA) before meeting with them. This post discusses why investors do not sign NDAs and why asking for one will almost always send a negative signal about your company.
The first reason to not demand an NDA is that they are hard to enforce. Listening to ideas is our livelihood. All NDAs include exclusion language like the following:
“This agreement does not apply to any information that: (a) was in Receiving Party’s possession or was known to Receiving Party, without an obligation to keep it confidential, before such information was disclosed to Receiving Party by Disclosing Party; (b) is or becomes public knowledge through a source other than Receiving Party and through no fault of Receiving Party; © is or becomes lawfully available to Receiving Party from a source other than Disclosing Party; or (d) is disclosed by Receiving Party with Disclosing Party’s prior written approval.”
When dealing with someone like me that meets with about four new companies per week, it will be hard to prove I have not heard something similar before.
A simple Google search “Do VC/Angels sign NDA’s” gives hundreds of definitive no answers. What does it say about an entrepreneur if they have not done basic research about how angel and venture investing works? Once again, a bad signal.
I am sure it is but so what? If you look at the history of innovation — ideas, are seldom unique — from Calculus (co-discovered by Isaac Newton and Gottfried Leibniz) to the early e-commerce wars (does anyone remember WebVan?), success is determined by superior execution, not secrecy. Ford over Packard, Google over Yahoo, ad Infinitum.
Over focusing on NDAs send the signal that an entrepreneur does not understand what is genuinely required for their company to succeed. They are also sending the signal that their idea needs secrecy to be successful — given that keeping secrets is almost impossible if you are raising capital. Not a good look. What NDAs are really signaling is that the company cannot build a competitive moat without secrecy.
Honestly, it is very hard. The approach we recommend to entrepreneurs is the following.
- Have an introductory executive summary/deck that outlines your business and its secret sauce in an as non-proprietary way as best as possible. Remember, this document’s goal is to whet the investor’s interest and get you a meeting.
- Protect operational details until finalized or until second meetings. Names of prospects and potential partners are worth protecting. But the basics of your business model are not.
- Understand that in due diligence, you will have to share everything.
- Do pre-check all investors for competing investments before contacting them. An investor stealing an idea is uncommon. Unfortunately, taking meetings with companies to gather competitive intelligence for a portfolio company happens all the time. Make sure you know what the investor’s other investments are before sharing critical information.
I hope this is useful. Please feel free to share your comments or questions.
Originally published at https://www.impactseat.com on October 26, 2020.