If you raised a dollar from someone other than your parents, you can probably skip this article because you already know how foolish it would be to ask an investor to sign a non-disclosure agreement. But if you’re a first-time entrepreneur trying to raise some seed cash, I’m pretty sure you have a shiny non-disclosure agreement ready for any investor who’s actually bothered to respond to your cold email. .
Your non-disclosure agreement probably got a promising initial appeal when you got your siblings to sign it. There is only one small problem in the future: no one else will sign your NDA (true story).
First, do you really need an NDA?
Short answer: NO!
But I get it. you spent hours painstakingly building a pitch deck and practicing your presentation. You’re ready to meet with investors and hope to secure the funding your startup needs to take it to the next level. You are afraid that one of them would steal your idea. Ultimately, you want to be the first to market your idea.
Let’s take a look at some of the most successful companies of our time, and you’ll realize that none of them came to market first:
- Larry Page and Sergey Brin did not invent the first search engine.
- Jeff Bezos did not invent the first online store.
- Elon Musk did not invent the first electric car.
- Steve Jobs did not invent the first smartphone.
The reason these entrepreneurs and companies became so successful is that they created superior products.
Here are four reasons why you don’t want to ask investors to sign a non-disclosure agreement:
1. You look like an amateur
Asking an investor to sign a non-disclosure agreement before presenting your pitch deck is a surefire way to appear inexperienced. Investors are professionals with a reputation to uphold and have no interest in putting their name at risk for your intellectual property. Asking for a nondisclosure agreement is a great nonstarter.
2. It creates a liability for the investors
If an investor has invested or will ever invest in a company with a similar idea, they could be sued because of that nondisclosure agreement.
“If a non-disclosure agreement is requested, we will continue as usual. Why? Because there is a 1% chance that we pass on the next Google and a 100% chance that we expose our fund to lawsuits,” said Aya Peterburg, Managing Partner of S Capital with whom our seed led Hourly.io.
3. It’s about the execution, not the idea
The most amazing idea is worth about a dollar (on a good day). Building a successful business from the ground up is the hardest part.
These startups are often plagued by talent access problems, go-to-market nightmares, and other growing pains that leave many angry customers and unfulfilled promises.
Most investors became investors because their passion is to support the next generation of entrepreneurs. They would rather put their money to work investing in your business rather than stealing your idea.
4. It’s a hassle that creates extra work
Sending out a non-disclosure agreement means investors have to read it now, come back with edits, pay an attorney to make changes, and wait for a response from you – all before they’ve even heard what you have to say. It’s just too much effort for an unknown opportunity.
And if they do sign the deal, investors should make sure to avoid breach of contract by remembering the details of your NDA as they evaluate thousands of pitches and select who to invest in.
Simply put, it’s easier for an investor to make a deal that doesn’t require the complexities of a non-disclosure agreement, which is what most investors will do.
Is there ever a time to request an NDA?
There’s never a good time to ask for a non-disclosure agreement, unless, of course, you want to narrow your list of potential investors to a nice zero. It’s much easier not to disclose sensitive information in early pitches than to ask for a non-disclosure agreement.
But while the general rule is that you shouldn’t ask for a non-disclosure agreement, that doesn’t mean you should never a good idea.
A non-disclosure agreement may be in order if you have an ongoing dialogue with an investor, and after several rounds of conversations, the conversation extends to technical due diligence with industry experts on their behalf.
At that point, if you’re going to disclose your intellectual property rights, asking for a non-disclosure agreement may seem like a legitimate request.
Find other ways to protect your intellectual property
Putting a unique spin on an original idea probably doesn’t warrant an investor non-disclosure agreement and may make you appear naive. Since a non-disclosure agreement is probably out of the question, try to protect your idea with other means, such as a patent.
My unsolicited advice: Forget the NDA and start building the best product in the world. The rest goes by itself.