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.