Why Investors Don’t Sign NDAs

U Posted by Admin
\ January 17, 2014

(This article originally ran in Forbes)

There's a popular misconception amongst first time entrepreneurs that sharing an idea without signing a Non Disclosure Agreement (NDA) will lead to some version of the Social Network, where Mark Zuckerberg steals the Facebook idea and becomes a billionaire.

The mythology sounds horrifying, but the reality is much different.  

In short – investors don't sign NDAs.  They won't sign your NDA.  Asking them to will make you look like you don't know what you're doing, and there are a few reasons for that.

No One Wants Your Idea

You may have the world’s most amazing idea.  It may be a complete pile of rubbish.  Either way, it's not about ideas.

Investors want Entrepreneurs, not ideas.  Anyone can come up with a great idea, but very few can actually pull them off.  

It's not that Mark Zuckerberg just happened to steal an idea for social networking.  It's that he was the most capable person to actually pull it off.  It's not like he was the first (Friendster, anyone?) or the most successful at trying first (Myspace, anyone?).

A clever idea may pique an investor's interest, but that isn't worth getting worked up about an NDA over.  You've got plenty of other hurdles.

Too Much Deal Flow

Investors see tens, hundreds or thousands of deals.  Signing a NDA could potentially prevent them from having a meaningful discussion with any potential investment after yours.  

Should they choose not to invest (and most won't) they would be stuck with the liability of a legal contract with you that prevents them from finding more deals.  That provides zero upside from them.

Don't Make Life Harder

Imagine you're an investor looking at hundreds of deals.  You find one that looks interesting and you reach out.  The startup responds by saying you need to sign a NDA.  

Do you go through the hassle of signing a NDA or do you just move on to the hundreds of other startups who aren't asking for a document that no one ever signs?  You can probably guess.

It's hard enough to get an investor to pick you among hundreds of other deals.  Don't make your life harder by insisting on them signing a document that they don't need to.

You Can't Enforce It

The power of any legal agreement is proportionate to your ability to enforce it.  Do you plan on suing investors in the near future?  Do you think the power of the document you've asked them to sign will give you adequate grounds to enforce that suit?

Probably not.

Focus on what you can control, which is what information you show them and what aspects of the business you are willing to share.

Share The Cookie, Not The Recipe

If your idea is so easily stolen that just hearing the concept is enough to allow anyone to replicate it and launch it better than you, than you've already lost.  

There is little protection in just a concept, so unless you've got a secret recipe behind it, signing a NDA doesn't do you much good anyhow.

You should be able to openly share the concept idea with anyone, since as soon as you launch everyone will have a taste of it anyhow.  If there is a secret recipe behind the concept, then by all means don't share that until you’ve gotten to know the investor better.

Very few ideas have a secret recipe, however, and you’re more likely to be explaining why you can defend this concept once it's launched.

What To Really Worry About

All of that said, there are some things you should consider protecting as you shop your idea around to investors.  

Investors who have investments in similar companies to yours could present a challenge.  You are essentially providing them with competitive information that they are free to share with their other portfolio companies.  Most honest investors will decline the meetings based on those grounds in the first place.

The other thing to worry about is the dissemination of your information.  Pitch Decks and Business Plans can get shared incredibly easily.  It's helpful to have a method to grant and revoke access online if possible, or to only present the key documents in person on your own laptop.  

You’re going to have plenty of challenges in attracting investors, don’t let your lack of access to them be one of them.


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