Why most VCs don’t sign NDAs

As most of you will know few VCs, and especially the larger ones, won’t sign NDAs.  I posted the explanation below as to why on my Tumblog earlier this year and I’m repeating it now on TheEquityKicker because this issue has come up a couple of times recently, including last Friday.

The words were originally penned by Brad Feld and Guy Kawasaki in 2006.  I agree 100% with their reasoning, although as befits my Englishness I would have toned down the language a little.  That said I don’t think it hurts to ram this point home.  The block text is taken verbatim from Brad’s blog.

Most VC’s don’t sign non-disclosure agreements.  Guy Kawasaki had a good comment on it in his Venture Capitalist Wishlist post.

“Before you even start addressing the hard stuff, never ask a venture capitalist to sign a non-disclosure agreement (NDA). They never do. This is because at any given moment, they are looking at three or four similar deals. They’re not about to create legal issues because they sign a NDA and then fund another, similar company–thereby making the paranoid entrepreneur believe the venture capitalist stole his idea. If you even ask them to sign one, you might as well tattoo “I’m clueless!” on your forehead.”

That basically says it all. I’d add a few things:

  1. Even if I was inclined to sign an NDA, I’d have to go through the process of reading it and deciding if it had any problems (many of them do – they are usually overreaching for the information being disclosed), dealing with my lawyer to change it, and you dealing with (and spending time with your lawyer) to accept or reject my requests. In some cases, I’d probably spend more time dealing with the NDA then with the entrepreneur and his idea. How stupid.
  2. I’d have to keep track of all the NDA’s I signed. It’s “yet another legal document” in the pantheon of documents we have to keep track of. Hmmm – maybe we should consider funding a startup to automate the creation and tracking of NDA’s. Nah. In 20 years of high tech (as an entrepreneur, angel investor, and VC), I’ve never been involved in a situation where an NDA in enforced except in an M&A context. It’s simply a waste of paper and time for anything but M&A.
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  • Nic, We take the same view, and I'd add that I've noticed a bit of a corelation between the degree of determination to get a CDA, and the quality of the opportunity. To some extent the more it takes to explain to the management why one doesn't sign them, the worse the plan when you get to see it! However, we see less and less businesses that expect one before they'll send the plan.

  • The irony is that I think in most cases an NDA wouldn't really have teeth; I think it's fair to assume that an entrepreneur asking for such is raising money for the first time, and really, which business that's out raising its first round has time to sue a VC over breach of contract?

    But there is a commodity implicitly on the table that's probably more valuable anyway — reputation. In the relatively close-knit startuper world, if somebody's a jerk, everyone will know pretty quickly. If an investor does nasty things they'll get branded as someone you don't talk to.

    That said, there's almost something cute about the “the idea is so important” phase. Yessiree, here in these 20 slides is the key to a billion dollars. I think most entrepreneurs have a phase of that with their first startup. Then somewhere along the line they realize that starting a startup is … hard.

  • DInglezos

    Nic I tottally agree with this. The problem is that some entrepreneurs think that they protect their idea this way, but I think they make more harm than good because no-one knows their product and thus can't give feedback. Afrter all you need to do some upfront research on your product and this involves talking to people. How can you do it, if nobody knows it ? I doubt anyone would sit to give feedback for an idea if they had to sign an NDA agreement.

  • Agreed. For most start-ups the risk of obscurity is greater than the risk of having their idea ripped off.

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  • Iain

    As a principle I don't sign NDAs primarlily because of the time involved and the number of opportunites that come through the door each month. I mostly agree on this post although I think if you get to the point of doing serious due diligence on a company it is only fair that one is in place – both for the company and their customers. Indeed, the customer you are talking to in DD can be more sensitive than the company.

  • Yes – once you are n serious DD the above arguments fall away and it is only fair to sign an NDA. For us that point is when the termsheet is signed.

  • Yes – once you are n serious DD the above arguments fall away and it is only fair to sign an NDA. For us that point is when the termsheet is signed.

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  • mat345

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  • Nick

    It's actually for me not about “protecting the idea” that's clearly amateur hour. That said I do want to know when VCs are sending my deck around to other investors that I may already know me or worse to their “buddy at [insert competitor company name here]”. Whilst some VCs have the integrity to ask or at least inform you, not all do. Basic courtesy for the entrepreneur is not something to be sneered at by the VC community as this article and some of the VC replies to it tend to do. In that respect an NDA does have worth.

  • Hi Nick – fair point about the tone of the article, and also about knowing where the business plan is going. However, an NDA is overkill for that concernt – a face to face conversation where you look the VC in the eyes and say please ask before you share would do it in most cases.

  • That makes sense to me. As we VCs we recognise our duty of confidentiality.