Why a VC Will Take a Lighter to Your NDA

Non-disclosure agreements (NDAs) can be important legal documents for the startup entrepreneur. If drafted carefully, the NDA can protect your confidential idea from being highjacked by employees and other parties. (Well, the NDA won’t actually stop the disclosure of confidential information, but it will make for a nice “EXHIBIT A” in your lawsuit against the leak.) Just don’t make the rookie mistake of asking a VC to sign your NDA.

Asking a VC to sign a NDA is tantamount to splitting 10′s at the blackjack table. You just don’t do it. In the least, it will show that you do not understand the mechanics of how VCs operate. At worst, the VC will burn your NDA and dump your submission in the trash.

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.

So what do you do if you have “the next greatest thing” that no one else can know about? Don’t tell anybody about it. Or at least be careful and selective of what you reveal. You may not have to disclose the entire schematic to pique the interest of a VC. And if you do get some interest, a VC may be a little more willing to sign your NDA at that point. Finally, remember that “first to market” doesn’t always make you the winner.

26 Responses to “Why a VC Will Take a Lighter to Your NDA”

  1. Sheik July 20, 2008 at 7:09 pm #

    If the idea of signing a NDA is not good – then can I make some confidential (or non confidential) agreement such that –

    My company "A" brought a proposal of a overseas government project – very profitable for VCs. VC1 likes it. "A" wants to make sure no "B" comes with the same proposal while "A" is probably shopping with VCs. Is there any agreement "A" can have signed by VC1 to make sure time is not wasted or lock the VC1 party for "A"?

    Is there any kind of agreement that VCs like to do instead?

    Thanks.

  2. Sheik July 20, 2008 at 2:09 pm #

    If the idea of signing a NDA is not good – then can I make some confidential (or non confidential) agreement such that –

    My company "A" brought a proposal of a overseas government project – very profitable for VCs. VC1 likes it. "A" wants to make sure no "B" comes with the same proposal while "A" is probably shopping with VCs. Is there any agreement "A" can have signed by VC1 to make sure time is not wasted or lock the VC1 party for "A"?

    Is there any kind of agreement that VCs like to do instead?

    Thanks.

  3. Stephan Wehner July 23, 2009 at 5:27 pm #

    On the other hand do these VC's require the entrepreneur to document that they have been talking to other people (third parties) about their "the next greatest thing" only under the protection of an NDA ?

    I thought that is needed when it comes to patents etc.

    – Stephan

  4. Stephan Wehner July 23, 2009 at 12:27 pm #

    On the other hand do these VC's require the entrepreneur to document that they have been talking to other people (third parties) about their "the next greatest thing" only under the protection of an NDA ?

    I thought that is needed when it comes to patents etc.

    – Stephan

  5. North March 25, 2010 at 10:23 pm #

    My understanding is that making any PUBLIC disclosure of the proprietary elements of an invention will essentially leave you with one year to file a patent application in the US, and possibly void an international application.

    In which case, how to handle a big "forum" presentation with many people in the room one has not even met?

    Or on the other hand, a meeting with a VC firm or angel group when everyone has at least shaken hands?

    I guess I think I should make a brief non-disclosure disclaimer "This information is confidential and in no way represents a public disclosure"…

    Is that legit?

    Thanks, North.

  6. North March 25, 2010 at 5:23 pm #

    My understanding is that making any PUBLIC disclosure of the proprietary elements of an invention will essentially leave you with one year to file a patent application in the US, and possibly void an international application.

    In which case, how to handle a big "forum" presentation with many people in the room one has not even met?

    Or on the other hand, a meeting with a VC firm or angel group when everyone has at least shaken hands?

    I guess I think I should make a brief non-disclosure disclaimer "This information is confidential and in no way represents a public disclosure"…

    Is that legit?

    Thanks, North.

Trackbacks/Pingbacks

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