Startup Lawyer | Why a VC Will Take a Lighter to Your NDA
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Why a VC Will Take a Lighter to Your NDA

Posted 17 Oct 2007

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.

28 Comments
  • Non Disclosure Agreements and Investors | Edge Venture
    Posted at 17:46h, 18 November Reply

    [...] recently read an interesting post over on The Startup Laywer explaining why asking an investor to sign an NDA will at best get you laughed out the building. I [...]

  • Venture Capital Could Limit Your Startup's Access to Funding and Grants | The Startup Lawyer
    Posted at 13:36h, 08 May Reply

    [...] Capital Firms. They won’t grant you a meeting. If you do get a meeting they won’t sign your nda. And you’ll be lucky if your startup gets any funding. Making matters worse, they could be [...]

  • Sheik
    Posted at 19:09h, 20 July Reply

    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.

  • Sheik
    Posted at 14:09h, 20 July Reply

    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.

  • Texas Startup Blog | Roll your own investor referrals!
    Posted at 10:51h, 27 January Reply

    [...] and DO NOT ASK a VC to sign an NDA. Ryan explains, “Asking a VC to sign a NDA is tantamount to splitting 10’s at the blackjack table. [...]

  • The Great Startup Idea That I Can’t Reveal (Yet) « FairSoftware’s Blog
    Posted at 12:02h, 11 March Reply

    [...] So next time you chat with me or anyone else, forget the NDA. [...]

  • Stephan Wehner
    Posted at 17:27h, 23 July Reply

    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

  • Stephan Wehner
    Posted at 12:27h, 23 July Reply

    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

  • On NDAs and Confidentiality « Both Sides of the Table
    Posted at 00:19h, 27 July Reply

    [...] the links to the NDA articles if you’re interested in more reading: Startup Lawyer on NDAs (here), Brad Feld (here), Jason Mendelson (here) and Guy Kawasaki (here in the first [...]

  • NDAs and Confidentiality | CloudAve
    Posted at 08:25h, 27 July Reply

    [...] are the links to the NDA articles if you’re interested in more reading: Startup Lawyer on NDAs (here), Brad Feld (here), Jason Mendelson (here) and Guy Kawasaki (here in the first [...]

  • How to approach "protecting the idea" problem? | Grow VC > Blog
    Posted at 15:51h, 04 January Reply

    [...] today’s world, VC and more professional Angel Investors don’t sign NDA’s and the reason is simple, they see same ideas many times over and don’t really want to be in [...]

  • North
    Posted at 22:23h, 25 March Reply

    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.

  • North
    Posted at 17:23h, 25 March Reply

    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.

  • Do I Need An NDA?
    Posted at 16:46h, 26 July Reply

    [...] of start-up companies with great ideas, but the truth is that over 90% of them will fail, and investors don’t want to waste their time knowing this. It’s generally not the idea that gives a product value, it’s the [...]

  • Raising money? Get a referral first! | Bookmarks
    Posted at 06:52h, 15 February Reply

    [...] slows down a VC as much as a comprehensive business plan.”Oh and DO NOT ASK a VC to sign an NDA. Ryan explains, “Asking a VC to sign a NDA is tantamount to splitting 10’s at the blackjack table. [...]

  • Why Startups Shouldn’t Ask Investors to Sign NDAsVentureStab | VentureStab
    Posted at 21:37h, 17 February Reply

    [...] In Why a VC Will Take a Lighter to your NDA, Ryan Roberts says that “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.” [...]

  • 5 ways to seem more experienced when speaking with investors and advisers. « Posts « eight five finishing | NYC Startup Advising
    Posted at 01:08h, 12 April Reply

    [...] your company. Most investors and advisers, including us, are hesitant to sign NDAs for a variety of reasons. Build trust and the right contract will [...]

  • On NDAs and Confidentiality | Both Sides of the Table
    Posted at 19:36h, 16 May Reply

    [...] the links to the NDA articles if you’re interested in more reading: Startup Lawyer on NDAs (here), Brad Feld (here), Jason Mendelson (here) and Guy Kawasaki (here in the first [...]

  • TheFoundersDesk.Com » StartUp Checklist – If Launched a Startup
    Posted at 17:07h, 06 September Reply

    [...] Length of NDA: 0 pages (2) Fees Paid to Pitch my Startup: $0 (3) Investors: Accredited Investors (4) Structure of First [...]

  • The Checklist Every Entrepreneur Should Read Before Launching a Startup
    Posted at 09:44h, 12 September Reply

    [...] of “Lost Founders”: Lock Down the IP (then Wish Them Well)Raising Capital 1. Length of NDA: 0 pages 2. Fees Paid to Pitch my Startup: $0 3. Investors: Accredited Investors 4. Structure of First [...]

  • I won’t sign your NDA! {Not yet at least} » Gentleman Standing
    Posted at 15:45h, 20 February Reply

    [...] Going to Raise VC? Here’s a Primer on Process, People & Powerpoint Deck – Mark Suster Why a VC Will Take a Lighter to Your NDA – Startup Lawyer Why Startups Shouldn’t Ask Investors to Sign NDAs – Jerome [...]

  • IP Protection Tip #3: More On NDAs « Birmingham Business Law Blog
    Posted at 10:03h, 09 March Reply

    [...] works. In our experience, the majority of professional investors refuse to sign NDAs. As set out in The Startup Lawyer, “if VCS maintained the practice of signing NDAs for each submission they received, only two [...]

  • » Why I Don’t Sign NDAs [Mark Welch's Perspective]
    Posted at 11:30h, 22 May Reply

    [...] Why A VC Will Take A Lighter to Your NDA (Ryan Roberts) [...]

  • Why Startups Shouldn’t Ask Investors to Sign NDAs | VentureStab
    Posted at 14:07h, 24 May Reply

    [...] In Why a VC Will Take a Lighter to your NDA, Ryan Roberts says that: “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.” [...]

  • Common Mistakes when Pitching to Investors « TOTAL ACCESS Resources
    Posted at 12:13h, 14 January Reply

    [...] likely won’t happen. Here are a few great posts by other investors that explain why in more [...]

  • On NDAs and Confidentiality | Both Sides of the Table
    Posted at 20:51h, 15 July Reply

    [...] are the links to the NDA articles if you’re interested in more reading: Startup Lawyer on NDAs (here), Brad Feld (here), Jason Mendelson (here) and Guy Kawasaki (here in the first [...]

  • Common Mistakes When Pitching to Investors | Orrick Total Access
    Posted at 12:13h, 21 August Reply

    [...] likely won’t happen. Here are a few great posts by other investors that explain why in more [...]

  • Steps to starting a company in 2014 | Danny Beckett Jr.
    Posted at 20:21h, 03 January Reply

    […] Length of Investor NDA: 0 pages (2) Fees Paid to Pitch: $0 (3) Investors: Accredited only (no crowdfunding until the rules are […]

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