As legal advocates, we counsel companies to enter into NDAs (non-disclosure or confidentiality agreements) whenever they share proprietary information. An NDA serves several purposes. It substantiates the date and terms on which information was shared, and if properly drafted, it can be enforced to halt damaging use of the information and give the company a boost when seeking compensation for any resulting damages.
A company undergoing a private equity investment or merger transaction enters NDAs with at least two parties: investment banks which may negotiate the deal and any potential acquirer before substantive meetings takes place.
But Angels and “Alphabet Stage” VCs serially refuse to enter into such agreements with target companies. Eric T. Wagner frames the tension in this Forbes article, noting that “when it comes to courting professional investors… who literally see hundreds, if not thousands, of [pitches] every year, you can forget about it. Stick your NDA back in your pocket because it won’t get signed. And worse, you’ll look like a fool for asking.”
Angels and VCs articulate at least three reasons for not signing NDAs:
- Company execution, not an uniqueness of an idea, propels the opportunity
- NDAs create undue liability for investors, considering the high volume of pitches they hear
- Companies would not pitch to them if they have a reputation for stealing ideas from entrepreneurs
Each of these points are valid for the most part. However, there are horror stories alleging unethical dealings (if not theft) perpetrated by investors that would cause any entrepreneur to think twice.
Ultimately its the investor’s prerogative however, since they’re writing the checks. So what should a cautious company do to protect itself, knowing that asking for an NDA won’t get anywhere, and might even make the entrepreneur look unseasoned just for asking?
Here’s some ideas:
- Learn about a potential investor’s process and reputation by talking to their portfolio companies, companies who have pitched them, and connected advisers
- Don’t overshare, and appreciate that digital media makes it very easy to copy and forward sensitive information
- Execute company-judo, using lack of an NDA to motivate an in-person meeting for sharing more critical and sensitive details after the potential investor has reviewed sanitized materials
- Have a draft term sheet ready to go which does include confidentiality restrictions- they are more acceptable at this later stage of negotiation
While it is true that a company won’t get the protection of an NDA when dealing with Angels and VCs, a thoughtful approach to the conversation can increase investor confidence and help you land the funding.
Matthew R. Kittay is a corporate attorney in Fox Rothschild’s New York office and Co-Chair of the American Bar Association’s Angel Venture Capital Subcommittee