When to Ask an Investor to Sign an NDA

Most of us have seen the movie The Social Network that shows how Mark Zuckerberg stole the idea for what eventually became Facebook. We know that entrepreneurs are protective of their ideas, but this scenario recalls the familiar adage in the startup world: ideas are cheap; execution is priceless. Zuckerberg didn’t just steal the idea. He actually improved the platform and made it work better. That’s execution. Investors care more about execution than ideas, so asking them to sign anything that protects your idea may actually do more harm than good. 

When it comes to protecting intellectual property (IP), it makes sense for an entrepreneur to take steps to keep it out of the hands of competitors. One pathway for protecting IP is a non-disclosure agreement, or NDA. A non-disclosure agreement is a legally binding contract that establishes a confidential relationship. The party or parties signing the agreement agree that sensitive information will not be made available to any others. 

NDAs are common between companies entering into negotiations with other companies. However, when approaching potential investors – angels or venture capitalists – asking them to sign an NDA is often unnecessary and could also harm your chances of getting funded. Here’s why: 

• You’ll look inexperienced. According to Forbes, most investors see an average of 20 deals per week, which equates to more than 1,000 per year. Imagine the legal burden that reviewing and signing an NDA places on investors.  
• You’re limiting what an investor can review and invest in. Hypothetically, if an investor signed your NDA, they could be barred from investing into other similar companies down the line. Is your idea or IP so extraordinary that an investor would be willing to give up similar future opportunities?
• You can’t enforce it. Sure, even if you get an investor to sign an NDA, how would you enforce it? And how would you know if they broke the terms? If you’re seeking investment, chances are you’re talking to numerous investors. How would you determine who broke the NDA?  

There are literally no benefits for an investor to sign an NDA.

Now that you’re convinced that NDAs are a no-go, what can you do to share your great idea? The best advice is to pitch the product and the vision for how you plan to scale it that doesn’t contain any confidential information. In other words, share the cake, not the recipe. If an investor invests in you and your company, they will do so after extensive research and due diligence. And then, they will work with you to maximize your success. It’s highly unlikely that they would share your IP with other companies to undermine your company. 

After your company has gained traction with customers and you’re generating sales, there will be times when you may need an NDA. For example, if you’re working with potential licensees, partners or contractors, it may be appropriate to ask them to sign. You may also want to ask employees to sign one to protect your IP. When in doubt, consult an attorney. You can also watch this video for an overview of this topic from a copyright protection expert at HSC.  

There are plenty of obstacles standing in the way between you and the success of your future company. Don’t add an unnecessary obstacle by asking investors to sign a document they don’t need to.