Monthly Archives: March 2011

Why Entrepreneurs Should Ask VCs to Sign NDAs

Everyone who has ever raised money from venture capitalists knows that VCs don’t sign NDAs. Their reasoning is this: since they look at so many businesses and might fund a competitor, they cannot be encumbered by a non-disclosure agreement.

But I’m not sure that rationale makes sense.

What an NDA is

 An NDA is a legal contract that protects the confidentiality of ideas, knowledge, processes, and other information between two or more parties. NDAs are common practices in the business world where, in order to create strong and trusting relationships, you often need to share confidential and sensitive information.

Most business executives, especially those in the technology industry, regularly sign NDAs because they treat confidentiality very seriously. Also, most employees sign an NDA when they join a company (and sometimes they sign an NDA when they are evaluating whether to join a company).

What an NDA is Not

An NDA is not a non-compete or an exclusive. Just because you sign an NDA with Coke doesn’t mean Pepsi cannot be your customer. It does mean that any confidential information you received from Coke cannot be revealed to Pepsi (or to anyone else). The information from Coke is their property. They just agreed to share it with you for a specific reason and you agreed not to share it with anyone else.

Now let’s get back to the world of venture capitalists.  When you are raising money, it would be unfair for the VC to sign an exclusive with you since they might invest in your competitor.  But it is also unfair that they can take all your data and insights and just give it to a competitor that they might invest in.  

Here would be a sensible change to the fund-raising process:

• For the first meeting between the VC and the company (including the initial deck), an NDA should not be required. Any confidential information (like revenue numbers) can be left out of the initial deck.

• But for any additional meetings between the VCs and the entrepreneurs, an NDA should be in place. This will increase trust between entrepreneurs and VCs, foster a more open discussion and exchange of ideas, and underscore the seriousness of confidentiality of the process.

Of course, as an entrepreneur, I’ve never done this myself and I don’t know how VCs will react.  (Even as an angel investor, I have never been asked to do it).  Potentially, only entrepreneurs at hot companies could demand this.  But this small tweak to the process might further the trust between entrepreneurs and their potential long-term business partners (the VCs).