Confidentiality and Investors
June 14, 2011
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“I have a world-changing, disruptive idea in the multi-media space! Can you sign an NDA so that I can tell you more?”
I get variants of this every week. And it never works.
Non-disclosure agreements (NDA) are legal documents that require effort to review and create long term liability. The vast majority of traditional venture investors will categorically refuse to sign any kind of NDA for the latter reason. It’s just not healthy for their business model to carry around years of liability for every business plan that they read.
So when should an aspiring entrepreneur ask for an NDA?
First and foremost, you need to understand that there are two different reasons from confidentiality: protection of information and protection of legal rights. The vast majority of start-up secrets are in the first category: business models, marketing strategy, product plans, software architectures, etc. You don’t want your competitors to have this information but you could hand your entire confidential business plan to a random guy at a cafe and absolutely nothing would happen (unless you are Apple).
Disclosing this information to investors without an NDA generally won’t cause any harm either. At least as long as they don’t put your slides on TechCrunch or hand your business plan to a competitor in their portfolio. The only protection against unethical behaviour like this is to validate the relationship. Work with reputable people; understand the constraints of their business (e.g. what competitors have they invested in); and remind them that your information is confidential. You want to get married to them, so you should be doing this kind of due diligence before the meeting anyhow.
Non-disclosure agreements are usually only needed to protect legal rights such as unfiled patentable inventions. Any kind of disclosure, even a quick story at a café, will severely limit your patenting options. It doesn’t matter if the receiving party cares about the information or even understands what you are doing. The act of disclosure itself is enough to cause commercial damage. It is therefore in the interest of your future investors to cover these concepts with solid paperwork.
Most investors never reach the depth where they need access to this kind of information. At TandemLaunch, the nature of our business model is such that we almost always have an NDA in the late stages of any project. Other “deep digging” investors will likely also have no concerns with an NDA at that stage. But there is no reason whatsoever to go to this level at the first meeting. At your first meeting you should describe who you are, what problem you are solving and how you are going to make money by doing so. None of this has anything to do with patentable inventions and thus shouldn’t need an NDA.