Why investors don't sign NDA's
There’s a popular misconception amongst first-time entrepreneurs that sharing a mere idea without having a signed Non-Disclosure Agreement (NDA) in place will lead to your own version of The Social Network, wherein Mark Zuckerberg (played by Jesse Eisenberg) steals the Facebook idea and becomes a billionaire.
This mythology is horrifying and persistent, but it differs greatly from the reality. Here, we will cover why investors don’t sign NDA’s and how stubbornly requiring one can kill your chances of raising capital.
Investors want entrepreneurs, not ideas. Anyone can come up with a great idea, but very few can actually pull them off. In the global marketplace, an elegant solution to a painful problem is just an opportunity, and opportunities are a dime a dozen. It’s everything that comes after the realisation of opportunity that turns it into a viable business; meaningful traction, a great startup team, solid social proof, the list goes on. These are the things investors’ dreams are made of.
It’s not that Mark Zuckerberg just happened to steal an idea for social networking. It’s that he was the most capable person to actually pull it off. He wasn’t the first to market (Friendster, anyone?) or the first to achieve success (Myspace, anyone?).
A clever idea may pique an investor’s interest, but that isn’t worth getting ahead of yourself and demanding a NDA. You’ve got plenty of other hurdles to jump.
Don’t Make Life Harder
A typical investor will review upward of 20 deals per week, or over 1,000 deals per year. Signing an NDA could potentially prevent them from having a meaningful discussion with any potential investment after yours.
Should they choose not to invest (and most won’t) they would be stuck with the liability of a legal contract with you that prevents them from finding more deals. There are literally no benefits to the investor in signing your NDA.
Now, imagine you’re an investor sifting through hundreds of deals. You find one that looks interesting and you reach out. The startup responds by saying you must first sign a NDA.
Do you go through the hassle of signing a NDA or do you just move on to the many other startups who aren’t asking for a document that no one ever signs?
It’s hard enough to get an investor to pick you out of the crowd. Don’t make your life harder by insisting that they sign a document that they don’t need to, don’t want to, and by all accounts, won’t sign.
You Can’t Enforce It
The strength of any legal instrument is directly related to your ability to enforce it. Do you plan on suing investors in the near future? Do you think the power of the document you’ve asked them to sign will give you adequate grounds to enforce that suit?
Focus on what you can control, which is what information you show them and what aspects of the business you are willing to share.
Share The Cookie, Not The Recipe
If your idea is so easily stolen that just hearing the concept is enough to allow anyone to replicate it and launch it better than you, then you’ve already lost.
There is little protection in just a concept, so — unless you’ve got a secret recipe behind it — signing an NDA doesn’t do you much good anyway.
You should be able to openly share the concept idea with anyone, since once your business is up and running it’ll be out there for all to see anyway. If there is a secret recipe behind the concept, then by all means don’t share that until you’ve gotten to know the investor better.
Very few ideas have a secret recipe, however, and you’re more likely to be explaining why you can defend this concept once it’s launched.
What To Really Worry About
All of that said, there are some things you should consider protecting as you shop your idea around to investors.
Investors who have investments in similar companies to yours could present a challenge. You are essentially providing them with competitive information that they are free to share with their other portfolio companies. Most investors will decline meeting based on those grounds in the first place.
The other thing to worry about is the dissemination of your information. Pitch decks and business plans can get shared incredibly easily. Your Fundable profile allows you to grant and revoke access online, allowing you to control who sees what. Alternatively, you could present important documents strictly in person, on your own laptop.
If you’re going to worry about anything, worry about actually getting a meeting with an investor. You’re going to have plenty of challenges in attracting investors — don’t make forcing them down the NDA path one more reason to not get a pitch to begin with.
In summary, if you’re going to worry about anything, worry about actually landing a meeting with an investor. There are plenty of inherent challenges as you work to attract investors — don’t create yet another hurdle by forcing potential investors to sign a pointless document.