If you’ve raised a dollar from anyone other than your folks, you can probably skip this article because you already know how silly it would be to ask an investor to sign a nondisclosure agreement. But, if you are a first time entrepreneur trying to raise some seed money, I am pretty sure you have a shiny NDA ready for any investor who actually bothered to respond to your cold email.
Your NDA probably got some promising initial traction when you made your siblings sign it. There’s just one little problem going forward: No one else is going to sign your NDA (true story).
First, Do You Really Need an NDA
Short answer: NO!
But I get it. you’ve spent hours painstakingly building a pitch deck and practicing your presentation. You’re ready to meet with investors and hoping to secure the funding your startup needs to take it to the next level. You’re afraid one of them might steal your idea. Ultimately, you want to be first to market with your idea.
Let’s take a look at some of the most successful companies of our time, and you’ll realize none of them was first to market:
- Larry Page and Sergey Brin didn’t invent the first search engine.
- Jeff Bezos didn’t invent the first online store.
- Elon Musk didn’t invent the first electric car.
- Steve Jobs didn’t 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 an NDA:
1. It Makes You Look Like an Amateur
Asking an investor to sign an NDA before presenting your pitch deck is a surefire way to make you seem inexperienced. Investors are professionals with a reputation to uphold and have no interest in jeopardizing their name for your intellectual property. Asking for an NDA is a great nonstarter.
2. It Creates a Liability for the Investors
If an investor has invested or will one day invest in a company with a similar idea, they may be dragged to court over that NDA.
“If asked for an NDA, we will simply pass. Why? Because there’s a 1% chance we are passing on the next Google and a 100% chance we are putting our fund at litigation risk,” said Aya Peterburg, Managing Partner of S Capital who led our seed round at 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 company from the ground up is the hard part.
These startups are often plagued by access to talent issues, go-to-market nightmares, and other growing pains that leave behind many angry customers and unmet promises.
Most investors became investors because their passion is to support the next generation of entrepreneurs. They’d rather put their money to work by investing in your business rather than stealing your idea.
4. It’s a Hassle That Creates Extra Work
Sending an NDA means that investors now have to read it, 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 simply too much effort for an unknown opportunity.
And if they do sign the agreement, investors have to make sure to avoid contract breeches by remembering your NDA’s details as they evaluate thousands of pitches and select who to invest in.
Simply put, it’s easier for an investor to go with a deal that doesn’t require the complexity of an NDA, and that’s what most investors will do.
Is There Ever a Time to Ask for an NDA
There’s never a good time to ask for an NDA–unless of course you want to narrow your list of prospective investors to a nice zero. It’s much easier not to disclose sensitive information in early pitches than asking for an NDA.
But, while the general rule is that you shouldn’t ask for an NDA, that doesn’t mean it’s never a good idea.
An NDA might have a place if you have an ongoing dialogue with an investor, and after several rounds of discussions, the conversation extends to technical due diligence with industry experts on their behalf.
At that point, if you are going to disclose your proprietary intellectual property, asking for an NDA may appear as a legitimate request.
Find Other Ways To Protect Your Intellectual Property
Putting a unique spin on an original idea probably doesn’t warrant an NDA from investors and can make you seem naive. Since an NDA is likely out of the question, try to protect your idea with other means such as a patent.
My unsolicited advice: Forget about the NDA and start building the best product in the world. The rest will work itself out.