Should You Send Prospective Investors a Non-Disclosure Agreement?

author avatar by Bryce Warnes8 min


published June 20, 2021

If you’re approaching a potential investor to pitch your startup, is it a good idea to have them sign a non-disclosure agreement (NDA) first?

No.

That is, except for a few specific—and rare—instances, there is almost no occasion when it’s wise to ask a prospective investor to sign an NDA.

In fact, most of the time, sending an NDA will harm your chances of getting funded. It will also make you look dumb.

Let’s look at the reasons why—as well as the few, rare occasions when you should send an NDA.

What is a non-disclosure agreement (NDA)?

A non-disclosure agreement is a legally binding contract that establishes confidentiality between you and another party.

NDAs are used by businesses entering into negotiations with each other. It’s also common for a business to have employees and contractors sign NDAs.

The NDA specifies what kind of information you’re prohibited from sharing with other parties. Then it says, in essence, “We reserve the right to sue you if you break the rules.”

Sometimes, during negotiations, the parties involved will sign a mutual non-disclosure agreement, each promising that they won’t share information about the negotiations with outsiders.

Why do people sign non-disclosure agreements?

A non-disclosure agreement prevents the signee or signees from using sensitive information to gain an unfair advantage.

Example: A larger company is interested in buying your company. During negotiations, you get access to confidential financial information. Now, you could take that information, and trade it with one of their competitors in exchange for a better acquisition deal. But if you do, the first company will be able to sue you—thanks to the NDA.

If you’re an employee and you signed an NDA with an employer, it’s because you may become privy to information they don’t want to share with the world at large—like their marketing plan, the technology that runs their product, or their quarterly financial reports.

NDAs are particularly important for companies selling proprietary technology. If you’ve invented a way to power space shuttles with the heat from cryptocurrency mining rigs, you probably don’t want Elon Musk stealing it. An NDA protects the information from getting leaked.

Why do startups send potential investors NDAs?

Some startups are worried about the recipe to their secret sauce getting out. They figure that if they share the details about their product with a venture capitalist (VC), the firm could share the information with startups already in their portfolio, or else turn around and put together their own, imitation company.

Luckily, with established investors, it’s incredibly rare for that to happen.

Why don't potential investors sign NDAs?

There are a few good reasons potential investors won’t sign an NDA:

1. It would cause too much hassle.

The truth is, any established VC who is willing to meet with you is likely meeting with a number of other companies who all have similar products or marketing plans. Likewise, an angel investor or syndicate lead is likely considering other options.

If they signed an NDA with every founder they met, they’d be stuck in a massive legal tangle. If Tammy the angel hears your pitch for a drone delivery service, and then decides to invest in someone else’s drone delivery service, you could try to sue her. She doesn’t need that kind of drama in her life.

Plus, for an investor who hears 1,000 pitches a year, it would cost an arm and a leg in legal fees to read, sign, and track all of them. It just isn’t worth it.

2. Your idea is not that special (sorry)

Besides the hassle of it, the real reason potential investors won’t sign NDAs is that your idea probably isn’t that original.

You invested time, energy, and cold, hard cash developing your product idea and marketing plan. And nobody is saying that’s a bad thing. But ideas and plans are a dime a dozen. Investors want to see execution.

If they invest in you, it’s likely because they believe you and your team have what it takes to bring your product to market, outmanoeuvre competitors, and take advantage of every opportunity that comes your way.

Remember, they’re likely already meeting with companies that have similar products. It’s not just your product they’re investing in—it’s you.

3. You’re not really going to sue them

NDAs are notoriously hard to enforce. In order to do so, you’ll need to prove, in court, that the investor in question stole your idea. With many similar product ideas floating around (see Reason #2), that’s hard to do.

Typically, most NDAs are more symbolic than practical: They send the signal that you’re serious about protecting your intellectual property, and lay the groundwork for what can and cannot be shared. Sending one to a VC just creates another document they need to deal with, without doing anything to build your relationship. (In fact, it’s more likely to cause harm—more on that in a sec.)

On top of that, it costs money to sue someone—especially an established VC firm with a team of lawyers ready to come to their defence. A young startup doesn’t stand a chance.

Sending an NDA to a potential investor makes you look bad

Maybe you’re thinking, But surely there’s no harm in sending an NDA. They can always refuse to sign it, after all.

Wrong! Sending an NDA does your cause harm, for two reasons:

1. It makes you look inexperienced

Investors want to place their bets on founders who know what’s up—who have done their research and amassed a little experience. Falling under the category Stuff You Should Already Know: The fact that it’s rare for VCs and other potential investors to sign NDAs, due to the reasons given above.

Sending an NDA sends the message that you don’t really know what you’re doing, and dealing with you may not be worth the trouble. Remember, VCs see hundreds and hundreds of founders a year; it’s easy for them to drop you and move on to the next candidate.

2. It sets a bad precedent in terms of trust

The truth is, any VC or angel who went around stealing ideas and backstabbing the founders who pitched to them would not last long.

But when you ask a potential investor to sign an NDA, you’re sending the message that you don’t trust them. You’re saying that, no matter how many successful deals they’ve been involved in, no matter how much trust they’ve cultivated or the reputation they’ve built, you still don’t trust them not to share your secrets. That can make you incredibly unappealing to work with.

When you absolutely must sign an NDA with a potential investor

It’s highly unlikely you’ll ever need to sign an NDA with a potential investor.

One exception: If you’re sharing highly technical, proprietary information that could be copied.

If you’re working in an extremely technically advanced sector, where your company’s success rides on a genuine scientific breakthrough, sending an NDA to a potential investor makes sense. When you’re building the future of quantum computing, space travel, or lab-grown hotdogs, you can’t afford to share your secrets.

But the truth is, most startups aren’t developing that level of technology. For instance, your sandwich recommendation algorithm may be poised to send waves through the lunch food industry, but it’s not much different from a music or book recommendation algorithm. Investors are more interested in how you’re going to execute the idea and kick the competition’s butt than they are in the technical details.

How to fundraise without an NDA and still protect yourself

Even if it’s standard to pitch potential investors without sending an NDA, and sending an NDA gives the wrong message, going in raw still has its risks.

You could end up in a room with a shady, fly-by-night investor who very much does intend to steal your ideas. Even if the firm you’re pitching to has a good reputation, that doesn’t stop an unscrupulous intern from leaking your information to their friends.

Here’s what you can do to protect yourself.

Only share what you’re comfortable making public

Rule of thumb says you should only invest the money you can afford to lose. That extends to pitching investors: Only share the information you can afford to leak.

Your broad marketing plan or product development roadmap may not be the kind of information you’d normally share on social media. But not all information you’re averse to broadcasting is top secret. After all, you wouldn’t shout your preference for boxers over your briefs from the rooftops—but if word somehow gets out, who cares?

Make it policy to only share in your pitch meetings what you are comfortable circulating in the environment at large. Other details—like the finer nuances of your code—can wait for a signed deal.

Research investors in advance

If you’re trying to get in front of as many investors as possible, it’s easy to lose track of details. Take your time, and make sure you really know who you’re talking to before you walk into a meeting.

What’s in their portfolio? Have they invested in your competitors? Or is information about their company suspiciously scant? Do your research now to save yourself an anxiety attack in the future.

Watermark your deck

This crumb of wisdom comes from Alexander Jarvis. Many investors are low on both tech savvy and time. You may be able to dissuade them from passing around your deck with a simple watermark, specifying the name of the firm you pitched to, and the fact that the deck is not meant for public release.

Not every information leak is the result of a genius plan to exploit your weaknesses. Someone at a firm you pitched could share your deck conversationally with a friend at another company, ie. “Here are the kinds of pitches we’ve been getting…”

In that case, they’re not going to go to the trouble to edit watermarks out of your deck, or copy and paste all your info into a new document. A watermark could make the risk of ruining their reputation not worth it—a watermarked deck being passed around has the potential to do them more harm than it does you.

Recognize when you’re being stolen from

Silicon Valley popularized the unsavory term “brain rape” to describe this situation: You’re in a meeting with potential investors, and they start grilling you on the finer engineering details at the heart of your product. Or maybe they just want to “check your code” before making a decision…

In either case, they’re stepping out of bounds—asking to get at information that could, potentially, lend competitors an advantage. Or give them the tools they need to copy your product completely.

If you’re being careful to share only the information you’re okay with leaking, you know you aren’t giving away any secrets. But be on your guard for questions that lead to questions that lead to you spilling the beans.

Admittedly, this situation is very rare, and it’s unlikely you’ll ever encounter it. But keep it in mind as you pitch potential investors, lest you become a horror story other founders tell around the campfire at night.

TL;DR

  • Asking VCs to sign an NDA makes you look inexperienced
  • It isn’t worth VCs’ time to sign NDAs, and it creates liability they can’t afford
  • If you’re worried about protecting your information, limit your pitch deck to include only information you’d be comfortable with going public
  • Always research potential investors in advance, to make sure they’re legit
  • If you’re pitching investors and they’re asking questions that could compromise your confidential information, end the meeting

Asking potential investors to sign an NDA makes you look like an amateur. But so does approaching them before you’re even prepared to take their money. For less than $1,000, Capbase incorporates your company in Delaware, generates your cap table, and sets you up to issue SAFEs to investors. Learn more about Capbase.

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Advice For FoundersConfidentialityIntellectual PropertyLegal DocumentsPitching
author avatar

Bryce Warnes is West Coast based writer specializing in fintech and entrepreneurship.

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