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Non disclosure agreements (NDA) for startup fundraising don’t matter, so don’t sign nda

Alexander Jarvis
Non disclosure agreements NDA fundraising startup

Nondisclosure agreements, sign NDA, NDA, confidentiality agreements or even proprietary information agreement, what are they good for? Well, I’ll tell you. ‘Will you sign my NDA?’ is a very frequent question first time founders have. It’s also really bad one. There has been a lot written on this topic. To save you time googling, I’ve put together a pretty definitive blog together. If you are short of time, just read the tl;dr. Or just this: don’t ask for an NDA, no one will sign it and you look dumb.

TL;DR

Table of contents (This is 5,500 words!)

What is an NDA?

What is the value of an NDA and why do some founders think they need a VC to sign one?

Who benefits from an NDA?

Why do VCs not sign NDAs?

What will happen if a founder asks a VC to sign an NDA?

Why shouldn’t I ask for an NDA?

What’s the worst thing that can happen?

What happens if VCs share or want get exposure to your space by hook or crook?

How honest VCs act when they catch you napping

How can I manage to not be an idiot sharing my confidential information?

What do the big name VCs think about NDAs?

When is an NDA ok?

Conclusion

What is an NDA?

An NDA is an acronym for Non Disclosure Agreement:

 

NDAs typically serve 3 key functions (3 truths and a lie!)

  1. NDAs protect sensitive information. By signing an NDA, you promise to not divulge or release information shared to anyone the NDA says you can’t (You may be able to share internally in your firm, for example). If you leak, the ‘injured’ person can claim breach of contract. Shenanigans!
  2. In the case of new product or concept development, a confidentiality agreement can help the inventor keep patent rights: In many cases, public disclosure of a new invention can void patent rights. A good NDA can help the ‘original creator’ hold onto the rights to a product or idea
  3. They expressly outline what information is private and what’s not: Often, the agreement serves as a document that classifies exclusive and confidential information vc what is not
  4. They are a great tool to blackmail investors and waste their time: Once you successfully sue the VC you will get celebrity status and everyone in the Bay area will want to work with you

What is the value of an NDA and why do some founders think they need a VC to sign one?

In my first month in investment banking, my VP had to explain NDAs to me. I asked why we do them and he said “You are never going to actually sue someone on one, but it sets expectations. No one has ever sued on an NDA”

“You are never going to actually sue someone on one, but it sets expectations. No one has ever sued on an NDA

Signing an NDA sets the tone that you are sharing confidential information and it is not to be shared. Upon signing one, if people ask you about the deal, you respond “sorry, I’m under an NDA.” It’s not only a good excuse to stay mum, but it makes you think twice too.

If I’m never going to get sued then why not flaunt it and guest post on Pando? Whilst you are never going to get sued, there is a real reputation risk of not being trust worthy. It would look bad on you and your firm. Why would anyone take the risk of being persona non grata?

Now to be clear we are talking about the sale of established, large, cash-making companies that are in a sale process (We have a ‘sell-side mandate”). After the sell-side banker sends potential buyers a teaser, the buy-side assert interest of entering a process, and the sell-side asks for an NDA to be executed before sending a 300 page IM (Information Memorandum) which literally lifts the kimono of the company with all their financials etc. This information is only useful in maybe 7 years- you are not this type of company (yet).

So no, you don’t get an NDA. No one cares about you, until they do. Investors generally don’t care about you before they have read your deck and maybe not till after the first or second meeting. An NDA is not a barrier to entry, or a protective provision, it is a barrier to getting you funded though. Do you really want to put up hurdles when you are racing against Usain Bolt?

What is the value of an NDA for fundraising then, in theory?

Almost none, there are some fantasy scenarios and some theoretically good ones:

Why do founders think they need an NDA then?

 

Who benefits from an NDA?

No one other than Lawyers and paper companies, neither one of which you really care about.

Ryan Roberts, a partner at Roberts Foster LLP, writes:

“If VCs maintained the practice of signing NDAs for each submission they received, only two groups would benefit: lawyers and paper companies. Lawyers would benefit because they would get to draft, edit, and negotiate each NDA. Additionally, the VCs would have to retain a team of lawyers to keep track of all the NDAs they’ve signed with the fund-seeking entrepreneurs that have come before you. Therefore, NDAs would increase a VC’s transaction costs and potentially prevent a VC from even hearing your pitch. Both reduce the already slim chances you will get funding.”

Why do VCs not sign NDAs?

Think about first contact like triage in the emergency room of a hospital. 1,000 patients come in with either the sniffles (Wantrapreneurs) or something really serious (the unicorns). Given the abuse of ER, there are only 1-10 really serious cases a year that the Doctor needs to see and focus on. The other 990 are not worth their time and the doctors (Partners) and nurses (Associates/analysts) need to get through the chaff in double time.

If a patient speaks English and Catalan, but insists on speaking Catalan for personal, nationalistic reasons, demanding a translator before they will talk to the staff, that patient is not going to be processed terribly fast, right? Asking for an NDA is like asking for a translator in a battle field. BTW, I used 1,000 patients as a benchmark for deal flow of a decent VC; the really big boys will get 5000-10000 patients a year!

There are 12 reasons VCs don’t’ sign NDAs, these are:

  1. Waste of time: VCs look at a lot of startups on top of having to run the firm, support their portfolio, report to LPs etc. NDA back and forth is simply really low ROI. Pulling the wings off flys and just saying no to founders and watching them cry is way more fun
  2. Waste of cash: VCs would spend their time and that of lawyers to review your NDA. Multiply the cost of staff by a few hours per NDA, by a thousand NDAs a year and you can see the math doesn’t work here right? Most if not all founders think they are special and there aren’t another 999 founders vying for the same concurrent attention. Also remember the cash that isn’t spent from management goes into the pockets of some of the Partners, which can be used to buy jewellery at the Rosewood 😉
  3. NDAs aren’t part of their work flow: VCs aren’t going to change how they do business to suit you. They are focused on triaging deal flow and stage one is whether you as a potential investment fit their investment thesis and requirements (e.g. category, stage). An NDA is a speed bump on an 8 lane high way. Establishing whether you pass a filter, which an intern can determine, saves both the founder and VC a lot of time
  4. Lack of incentive: In most cases they just don’t care till they do. Reading and signing an NDA is a friction cost that could prevent a VC even reading your pitch once you finally get to sending it over. Particularly when you don’t have a strong tie to a VC, why would they make the effort?
  5. VCs would have to keep track of NDAs they signed which is boring: If VCs wanted to be lawyers they would be. Every time they signed an NDA they would have to check the docs when they talked to a new startup. It’s just too boring to be viable
  6. Some VCs have analysts/associates vet pitch decks: If a junior member of a firm had to keep asking for permission to look at a deck and get the boss to sign one, they simply couldn’t be bothered
  7. Chance of getting sued: No one likes to be sued, and in places like America it seems to be a national pass time. Even if a VC wins, they lose. They generally have a bigger public image than founders too. In a hot sector with many similar ideas, if VCs signed NDAs with each of the players they looked at, and invested in one of them, the other who don’t get funded would claim their idea “stolen” and potentially use their favourite pass time and executed NDA as the basis for legal action
  8. They are not going to steal your idea: VCs do what they do so they don’t have to do the hard work (lol). Sure they occasionally have EIRs (who could steal your idea and do it, or even join you?) who you might want to be careful of though, but still… It is not the VCs job to steal ideas and execute on them. Look, ideas are cheap and plentiful; market opportunities are rare and valuable. At early stage a VC really only cares about the market and the team- those are harder to rip off
  9. In a hot sector, many startups start at the same time and VCs sleep around till they find Prince Charming: Food was hot in 2015, AI is hot in 2016. When the timing is right there are a lot of startups to place a bet on. Most VCs place a bet on one so will look at everyone till they feel Goldilocks. Note that Thematic VCs and sneaky ones may invest in a number as they don’t’ care who wins so long as one does. Rocket Internet has done this in food delivery startups with Markey Spoon, HelloFresh, Food Panda and Delivery Hero. Victor Hugo said “an invasion of armies can be resisted, but not an idea whose time has come.” When an idea’s time is prime, many founders independently “discover” the same idea at the same time. Furthermore blatant copy cats in other markets all come up with a weak origination story… But let’s face it, the best VCs have deal flow, they see it all, yours and others. Do you want the investor that doesn’t have deal flow?
  10. VCs know NDAs are almost never enforced and so not worth the PDF they are digitally signed in: As I mentioned above, NDAs are only ever enforced in much larger contexts such as M&A, IPOs, huge commercial distribution deals etc. If you don’t have the same commercial understanding how are you going to scale your startup?
  11. NDAs may not stand up in court and you have to prove guilt: So you are pissed, even with a signed NDA you have to prove the VC you are suing did whatever you are having a hissy fit about, you have to prove they did it! Hang on a second, do you even have the cash to litigate a VC for a year? Ok so you do… do you know how high the burden of proof is? You need to prove that there was no other means by which they could have had happened upon the information, provide evidence that they did it with full knowledge and if what you shared is publicly available, it simply won’t hold up in court. So likely 1/ you don’t have the cash to sue and 2/ you won’t win, so why bother? Also, litigation is very slow, the horse is out of the barn
  12. Suing will make you a leper: Suing investors will not help you make friends and influence people. Even if you win, who the hell is going to sign an NDA, or work with you in future? News travels fast and people love gossip. If you win, everyone will know about you. But maybe Ellen Pao will fund you?

What will happen if a founder asks a VC to sign an NDA?

The investor will smirk or roll her eyes depending on mood, and either delete your email or send you a canned response, which, either 1/ terminates the thread, or 2/ waits for you to acquiesce and send the deck anyway since you have less leverage than the VC.

The times someone has been naive enough to ask me to sign an NDA, I have sent a brief response along the lines of:

“I and no other VC will sign an NDA as we look at many deals, sometimes in the same sector and can’t be conflicted. I also recommend for your benefit that you don’t ask other VCs to sign one.”

The people who ask have always been CFOs or have an investment adviser.

The important principle to understand here is leverage. Unless you are Carly-Anne, the prom queen at the ball (ie Slack) and the whole football team (everyone with a check book) wants to ask you to dance, you are frumpy in the corner with potentially a nice personality. In short, you have no leverage. If the quarterback thinks you are smoking hot, you can do what you want, ask for an NDA whatever (hmmm, maybe).

In most cases, the reality is like some 90s movie; the quarterback talks to you to make his ex-girlfriend think he is a nice guy (ie you get an intro through a trusted contact) and he progressively realises you just dress bad and are in fact a total hottie he wants to go steady with. You then only get leverage if he gives you a term sheet and the other investors get FOMO and ask you out too, but at this point, you don’t care about the NDA anyway, right.

Why shouldn’t I ask for an NDA?

If it isn’t clear yet, here are the 6 reasons you really shouldn’t ask for an NDA:

  1. Trust red flag: You are implicitly telling the VC you don’t trust them, this is not a great start to, what could end up being a very long marriage is it? Gold-diggers freak out at pre-nups, can you imagine sending one to a dude/chick on Tinder before a first date? Yes, that would be dumb and so is asking a VC. As Mark Suster at Upfront Ventures says: “If we had a reputation for sharing proprietary information we wouldn’t get too many entrepreneurs knocking on our doors.”
  2. I have n00b stamped on my head: There are so many sources of information these days of how not to be a total n00b, that it’s almost a test VCs set to see if you have done any basic research and are taking this raise seriously. Asking a VC for an NDA is like a trip-wire for stupidity. If you set off that big badda boooom what happens next is unlikely to be auspicious
  3. Implies your idea and what you have done are more important than what you will do- execution!: Ideas don’t matter, execution does. If you are so confident in your ability to hustle and get shit done, do you care if your competition knows something about you? Huh, aren’t you about to tell the VCs that you are going to out-execute everyone and you have a better team (your ‘special sauce!’).

As Brad Feld, Managing Director at Foundry Group says in Are Watermarks On Presentations Useful?

“Also – remember that it’s rarely the idea that matters – it’s the execution of the idea.  So – even if your presentation gets passed by a VC you approach to a potential competitor that is in their portfolio, it probably doesn’t matter much beyond the notion that a potential competitor is now aware of what you are thinking about.  You will still have to execute – as will they – to be successful.”

  1. Where you start and end may well be different: Startups sometimes make big pivots, focus on a new demographic etc, right? Twitter/Odeo, Instagram/Burbn etc. VCs know you will change and the value of an idea is limited. It’s only what you execute that matters
  2. Your secrets are not as secret as you think: Very few things are unique and very few ideas are unique to you. Someone else has had your idea already, just not executed on it. unless you have a Theranos (that works) sort of startup or the formula for Coke, who cares about your new food delivery idea?
  3. There is always a way to screw you, or brain rape you: Why can’t a VC have a series of meetings with you, bring in some ‘experts’ to evaluate your idea, take notes and get more value than the garbled attempt at communication you called your pitch deck? It happened in Silicon Valley right? It is called brain raping. I’ll show a little video about it later in the blog.

What’s the worst thing that can happen?

Now there are super edge cases where sending your deck to VCs has a dark side. I personally have not heard of bad things happening at a reputable investor, but without a doubt it has and will continue to happen- most likely sending a deck to portfolio startups (your bad for not checking their portfolio!). I have however read about two instances of it, which I’ll share in the next section.

Sequoia Capital actually say not to share confidential information:

“Do not submit any information or other materials that you consider to be confidential or proprietary. Because of the large number of business plans and related materials that we review, and the similarity of many such plans and materials, we cannot accept responsibility for protecting against misuse or disclosure of any confidential or proprietary information or other materials in the absence of our express written agreement to do so.”

These are the negative outcomes I can envisage:

What happens if VCs share or want to get exposure to your space by hook or crook?

It’s not VCs job to rip your idea off and do it themselves, though that is not to say they might not facilitate it. Brain raping is real, I have heard about it first hand in Asia and it has got into the Silicon Valley show; there is no smoke without fire, right?

 

Here are 3 examples of brain raping:

#1 the TV version of how it happens

Actually, YouTube won’t allow me to embed the video so you need to click on the photo/link. Don’t worry, we’ll wait for you whilst you watch it.

 

#2 The venture build pitch to a potential VP of eng

The first real example I have read about of VCs sharing startups’ decks comes from 2008 posted on the blog of a founder called Rich Skrenta with the title Spice Girls VC. It goes a little something like this:

So one day a few years ago I’m sitting in a VC’s office having a chat. I had a few ideas rattling around in my head but the VC had his eyes on a then-current space which was hot. He tossed a business plan for one of the leading startups into my lap.

“Where’d you get this?” I asked.

“They gave it to me.”

He went on to talk about how he wanted to launch a company into the space as well, and I’d be a great vp eng. He said he knew a guy with some technology who could be cto, had a vp marketing in mind, and then we’d just need a world class ceo to round out the band.

I formed a theory that the process of seeking VC ended up calling your own competitors into existence. You’ll meet with many more VCs than the 1-2 who end up funding you. But after seeing a company or two get funded in your space, the VCs who passed or weren’t able to get in decide they want to have a bet in the space too. Fortunately they have the benefit of having heard your pitch and the opportunity to personally grill you at length on your approach.

#3 The VC anecdote of shady investors in Canada, eh

The only example I have found of VCs sharing startups’ decks comes from a YouTube video in late 2009 from Jacqui Murphy at Tech Capital Partners in Canada. Skip straight to 35min 30sec to see the anecdote.

So now you have some ideas of how it might play out with dodgy VCs.

How honest VCs act when they catch you napping

I recon almost every top VC is pretty honest- it is a sickly small world and shady dudes will be found out eventually, right? You don’t last long once people find out you are not trustworthy. Lies pile up and the truth will out.

If you a too lazy to check a VC’s portfolio, manage to get a meeting and the VC realizes they might be conflicted, they will tell you. A shady one will not.

If an honest VC is potentially conflicted it will go something like this:

“I’m sorry. I need to stop this meeting right here. We invested in Widget, Inc which does middle out compression for enterprise clients, they call it the box. I’m not sure if you are a direct competitor or not, but for full disclosure I think it best for you to decide if you would like to continue this conversation.”

At this point you can either:

  1. Stop: Say thank-you, I didn’t realise, it’s best for us to end this meeting, but I appreciate you taking the time to meet us
  2. Continue: Say, I’m aware of them, we do something different focused on consumers. It is your knowledge in this space we want to leverage and actually see some portfolio synergy. We would be happy to continue the meeting so long as you have the intent to concentrate your investment in this category?

In either event, you have a little egg on your face as a founder but it’s not too bad. Shake hands and be grateful you met one of the good ones. I have seen this happen a few times, so it is not imaginary scenario.

How can I manage to not be an idiot sharing my confidential information?

I purposefully phrased that as ‘confidential information.’ Don’t share confidential information willy-nilly. You can do a normal deck and not share your ‘special sauce.’ You don’t need to put out till you get bought a steak dinner, right? 😉

Your deck/teaser etc most likely will not get in the grimy hands of your arch nemesis, but you should assume it will. So don’t share details that must remain confidential until you absolutely need to. Think about ‘middle out’ in Silicon Valley.

So here are my 12 tips to not be a dummy:

As Brad Feld, Managing Director at Foundry Group says in Are Watermarks On Presentations Useful?

“When I see something that could be construed as competitive with a company in my portfolio, I generally mention this to the entrepreneur approaching me right away and give them control over whether or not they want to send me any other information. “

Mark Suster at Upfront Ventures says:

“When you write your Powerpoint deck write it with the assumption that people you don’t want to read it will get a hold of it. It probably won’t get in the wrong hands but keep your information high-level enough that you wouldn’t feel compromised if it did. The detailed information can be delivered verbally and/or in follow up documents once you know that they VC firm you’re talking with is more serious.”

What do the big name VCs think about NDAs?

To drive home the point that VCs don’t like sign NDA, here are some quotes from well known VC bloggers and venture capitalists:

Brad Feld, Managing Director at Foundry Group

“Asking the venture capitalist to sign a nondisclosure agreement, or sign NDA: This is a stupid idea perpetuated by lawyers. Most venture capitalists will not sign an NDA, so all you’re doing is putting up a barrier to get their attention and demonstrating your naivety.”

Guy Kawasaki, Author and founder

“[D]on’t ask any potential investor to sign a nondisclosure agreement (NDA), because asking them to do so will make you look clueless. Venture capitalists and angel investors are often looking at three or four similar deals, so if they sign an NDA from one company and then fund another, they expose themselves to legal action. If you find an investor who is willing to sign and just to hear your idea, you probably don’t want his or her money.

I’ve never heard of a venture capitalist or angel investor ripping off an idea—frankly, few ideas are worth stealing. Even if your idea is worth stealing, the hard part is implementing the idea, not coming up with it. Finally, continuing the dating analogy, you probably won’t get very many dates if the first thing out of your mouth is “Will you sign a prenuptial?”

Mark Suster, Upfront Ventures:

“Will a VC sign an NDA (non-disclosure agreement)? No. If they did they would be in constant violation because VCs often see 3-4+ companies in every market that they operate.  NDAs would make it impossible to do business. Asking for one to be signed shows naïveté.”

When is an NDA ok?

When you do sciency stuff I don’t understand and you need a PhD to evaluate it before a deal gets done. This is the only time you are going to have an NDA signed, and it is only going to apply to that tech, not the more general process, or disclosed info too date.

Theranos never shared how they did their witchcraft, which is also why they never got top-tier VCs and got Wellington instead (Who also invested in Powa Technologies, a total disaster of a company). They raised a ton of cash without sharing their special sauce.

Conclusion

Don’t ask to sign nda NDA. Any questions, ask below.

Best from Florence, Italy. Now i’m going to see the Uffizi gallery!

Want to learn more?

The real reason founders aren’t funded you will never hear a VC say

This is how to get introductions to venture capital investors for your startup fundraise

Why I want a pitch deck before a pitch

Why you are making a financial model for your fundraise is wrong

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