Should You Have An Investor Sign an NDA?

You can’t wait to share your startup idea with investors. So, should you ask a venture capitalist to sign a non-disclosure agreement (NDA)? No.

Non-disclosure agreements are also called confidentiality agreements and they say that the person with whom you share your idea won’t tell it to anyone else. Seems fair, right?

But, most venture capitalists do not sign non-disclosure agreements. They don’t need to. They have so many deals to look at and most entrepreneurs don’t try to get them to sign non-disclosure agreements (maybe at one point they did but now startup founders know better than to ask). Venture capitalists do not want to manage all that paperwork – negotiate the terms and keep track of all the confidentiality agreements. Plus, they do not want to take the chance that some entrepreneur sues them. They look at lots of deals and they also don’t want to be prohibited from investing in any certain types of companies or ideas.

If you are a venture capitalist and invest in a company that does something similar to a company you looked at and did not invest, but for which you signed a non-disclosure agreement, even if you never do anything wrong at all, the entrepreneur in whom you did not invest may bring a lawsuit. These things happen. It is hard to know if someone did something wrong or it just has the appearance of possible wrong doing.

Angel investors are a little more inclined to sign non-disclosure agreements, but most angel investors who invest for a living will not sign them either.

There is a prevailing school of thought in startup world that ideas don’t matter. People and execution are the keys to startup success. By and large, I agree with this thinking. Still, there are some great ideas out there and it helps to have one. But, it doesn’t help to never share it with anyone.

So, be careful with whom you share your startup idea if it really is the next big thing (it’s not lost on me that most entrepreneurs think their startup idea is the next big thing even though it often isn’t). Research the venture capitalist. Look at their reputation. Don’t bring your amazing idea to them if they have a portfolio company (a company they funded) that is in exactly the same space/market and they have a board seat on that company.

You can also put your startup pitch deck online and take it down at a later point in time (if the venture capitalist passes). This is not a perfect way to control the flow of your information, but it’s one approach. Check out I say in my video explanation of this topic not to give venture capitalists things in physical form, but you are better off giving them a physical pitch deck than an electronic one (unless it’s online and can be pulled down later — that’s the best approach).

Ultimately, some VCs may want you to send your startup pitch deck as an attachment to an email. That’s the least effective way to protect your pitch deck from being sent to the wrong people. But, that’s probably not why the venture capitalist wants it that way. It’s more likely because she likes to review pitch decks that way and not online. That’s a business decision and, personally, I’d lean toward sending them whatever they want in whatever way they want.

Could someone steal your idea? Yes, of course. But, the much bigger risk is the right person/people never hear your idea and it doesn’t go anywhere. Take precautions, but don’t be crazy about it. Trust the process and chase the money!

What is a Non-Disclosure Agreement and What Are They Used For?

Non-Disclosure Agreements, or NDA for short, are documents that companies use to protect their confidential information. So if my company has some proprietary or confidential info and I want to share it with you, maybe we are thinking of starting a venture together, I may ask you to sign an NDA.

In that agreement you say you will only use the information for the purpose we agreed to. In this case, looking into going into a venture together. You will not use the information for your own commercial advantage and you will not share the information with others.

Sometimes, they’re limited by time. Sometimes, there are other provisions in them, like a non-circumvent which says “you won’t go around me and try to do business with my customer.” That’s provision is in a brokerage context.

The main crux of an NDA is what I told you about. I’m giving you some confidential info so don’t use it for your own advantage. Many startups want to protect their idea with an NDA before pitching to an investor. Check out my video on whether or not you should ask a venture capitalist to sign a non-disclosure agreement.