Startups represented by seedling growthStartup clients often rely on independent contractors and advisors during their early stages but do not have the cash to pay them, so they turn to equity compensation. Stock options are a great incentive tool, but founders should consider the following before issuing options to advisors or independent contractors:

  1. How Much?: Most founders grant early advisors and contractors options that cover anywhere from 0.10% to 1% of the company’s fully diluted stock on a case-by-case basis. Founders should consider (i) how important the advisor or contractor is to the success of the company, (ii) how much time the advisor will commit to the company, and (iii) the maturity level of the company and its future growth prospects. Advisors and contractors may talk to one another about their option grants, so be consistent and prepared to explain the rationale behind the grants.
  2. Vesting: Just like option grants to employees, advisor grants should be subject to a vesting schedule. Advisor grants typically vest on a monthly basis without a cliff over a period of 12-24 months, although shorter or longer vesting schedules may be appropriate. In certain scenarios, vesting schedules for independent contractors may be customized so that all or a significant portion of the grants do not vest until completion of the project for which the contractor was hired.
  3. Exercise Period: Vested Incentive Stock Options (ISOs), which can only be granted to employees, must be exercised within three (3) months after the employee’s termination. This is not the case for Non-Qualified Stock Options (NSOs) issued to contractors and advisors, but most equity incentive plans require both types of options to be exercised within the three (3) month period. Experienced advisors may negotiate to extend the exercise period because they do not have the cash to exercise the options or are not prepared to pay the tax associated with exercising the options. Depending on the relationship with the advisor, it may be in the company’s best interests to extend the exercise period, especially with advisors who may be able to help the company in the future through their expertise or connections.
  4. Intellectual Property: All advisors should sign some form of confidentiality and invention assignment agreement. Although many advisors or contractors may resist, such agreements can be tailored to address the advisor’s concerns while still protecting the company ownership of its intellectual property, which is key to the company’s future success and ability to obtain venture financing.

Quick quiz:

  • If your startup is seeking investors, will you have more success with private equity or venture capital firms?
  • How about when you’re looking to sell that company?

Businessman giving Vulcan greeting from Star TrekThe answers are (1) venture capital and (2) private equity.  If you weren’t sure, you’re not alone; the terms are often confused or used interchangeably.  However, PE and VC firms generally have very different investment strategies.  Understanding the distinctions may help save time and money and…perhaps…save face (i.e., not everyone will judge you for confusing Star Wars and Star Trek, but others will never forget).

Like most either/or categorizations, the distinctions blur in the middle, making generalization dangerous.  But in basic terms, here is what you need to know to avoid that awkward Han Sulu moment.

Characteristics of a PE investment (or, investing by Vulcan rationality)

PE firms typically invest in existing companies with a quantifiable track record (including proven cash flow), existing products or services, and potential for value creation.  PE investors may also consider businesses that complement their existing constellation of portfolio companies.  Therefore, whether or not PE firms invest in a company is a highly data-driven decision.  PE firms purchase a majority stake (often 100%) in their target investments.  This permits them to take an active role in their portfolio companies and to create value through financial engineering and restructuring.  In broad brush terms, this investment strategy focuses on value.  PE firms purchase underperforming or undervalued companies intending to guide them to optimal performance, increase their value, and sell them for a profit.  In other words, PE firms help existing companies realize their potential and boldly go where they have not gone before.  Because this strategy applies in many circumstances, PE investments are made across a wide set of industries.

Characteristics of a VC investment (or, investing by Dagobah ecosystem)

VC firms typically invest in emerging companies, which may have no or a limited operating history, but potential for light speed growth.  Therefore, whether or not VCs invest in a company is a holistic decision involving analyzing ideas and people (i.e., the business plan and the founders’ and management team’s ability to execute it).  To mitigate risk, VCs diversify their investments by making minority investments across a universe of startups.  Because they purchase smaller stakes, VCs have less control than PE firms over the day-to-day operations of their portfolio companies; however, VC’s often retain veto rights over certain major decisions.  In broad brush terms, this investment strategy focuses on growth.  VC firms invest early in the hopes of sharing in the upside upon exit or IPO.  These criteria keeps many VC investments industry-specific (e.g. technology and life sciences).  Although startups often fail, VCs can earn attractive returns if even one rebellious company blows up and disrupts an existing empire.

Of course, PE and VC investments have similarities, not the least of which is seeking above market returns.  The primary difference is how they arrive there.  From a company’s perspective, VC and PE firms serve distinct purposes and are appropriate at different stages of a company’s life cycle.  Entrepreneurs must understand the differences between VC and PE firms and their investing philosophies to ensure they’re approaching the appropriate investors at the right time.  Of course, there is much more to consider.  This is just a high level overview intended to demonstrate that there is a difference.  In a critical moment, remembering that PE firms invest like Vulcans and VCs invest like Jedis might remind you of the key distinctions.

An abbreviated version of this article will appear in the American Bar Association’s Business Law Today, Fall 2017 Edition.

Is your startup brand so strong that consumers tattoo the logo on their arm? Or so hard to pronounce that investors, vendors and customers are disinclined to do business with you?

"Hello, my name is..." nametagAccording to a study published in the peer-reviewed academic journal Venture Capital, your company name matters even more than you think.  The study, entitled “The Effect of Company Name Fluency on Venture Investment Decisions and IPO Underpricing,” found that a startup’s name can seriously affect how a company is perceived by investors and customers alike.

Names that are easily pronounced, such as Uber and Lyft, are preferred by both early and late-stage investors. They tend to be offered more money, whether its through crowd funders, angel investors, VCs or IPO investors.  The study also found that “uniqueness” is virtue, but only with early-stage investors.  According to the study, since very little is known about a company in the early stages, unique names give the impression there is something special about the company.

On the other hand, difficult names “evoke cues of unfamiliarity and create a perception of high novelty, which is valued by these pre-venture stage investors,” according to the study. The study cautions, however, that novelty wears off by later stages, when unique names can make more risk-adverse investors feel uncomfortable.

This study adds to the list of impacts that name can have on a venture, including:

  • An easy to pronounce and remember company name could get you more funding and customers as you grow
  • Company names and logos which are “unique”, “unobvious” and/or “novel” when associated with your services get stronger trademark protections faster with the USPTO
  • Securing 360-branding including a web domain, Instagram and Twitter handle, and an issued trademark on the name and logo early in the process with the help of an IP attorney saves cost and time as you roll out your product

Often founders launch or pivot on a name only to realize the Instagram account or web domain is taken, causing confusion in the market and requiring expensive litigation or licensing deals to consolidate your brand.  A strategic approach to choosing your company name ensures a consistent and easy brand association across digital and print media as well as adding to your successes with investors and customers, saving you time and money as you go to market.

The Problem

As every founder knows, starting and scaling a company is an extremely difficult and multi-faceted undertaking. In addition to the primary goals of developing a viable product, finding (and in some cases building from scratch) a robust market, and raising the capital necessary to sustain their business and operations, founders and their core teams also grapple with the day-to-day management and operations of a growing enterprise, whether that be personnel issues, forecasting cash needs and burn rates or tackling the legal and regulatory hurdles that often go hand-in-hand with the creation of disruptive technologies. Unfortunately, given the size and complexity of the average founder’s workload, it is no surprise that emerging companies of all sizes occasionally neglect to heed the advice of their attorneys and ensure that any and all corporate actions taken by the company and its officers are properly authorized and, if necessary, approved by the company’s Board and stockholders.

The Exposure

Copyright: tang90246 / 123RF Stock Photo

Under the Delaware General Corporation Law (the “DGCL”) otherwise permissible corporate acts that do not satisfy the consent and other procedural requirements of the DGCL, the corporation’s organizational documents or any other agreement to which the corporation is a party, are deemed to be “defective corporate acts” and are generally held to be void and of no legal force and effect.[i] The pre-2014 historical body of Delaware case law held such corporate acts, taken without “scrupulous adherence to the statutory formalities” of the DGCL, to be acts undertaken “without the authority of law” and therefore necessarily void.[ii] Prior to the enactment of Sections 204 and 205 of the DGCL, the relevant line of Delaware case law held that corporate acts, transactions and equity issuances that were void or voidable as a result of the corporation’s failure to comply with the procedural requirements of the DGCL and the corporation’s governing documents could not be retroactively ratified or validated by either (i) unilateral acts of the Corporation intended to cure the procedural misstep or (ii) on equitable grounds in the context of litigation or a formal petition for relief to the Court of Chancery.[iii] In short, there was no legally recognized cure for such defective actions and the company was left forever exposed to future claims by disgruntled shareholders, which could ultimately jeopardize future financings, exits and ultimately the very existence of the company.

The Statutory Cure

Luckily, for those founders who make the potentially serious misstep of failing to obtain the required consents and approvals before taking a particular action (e.g. issuing options to employees or executing a convertible note or SAFE without the prior consent of the Board), in 2014 Delaware enacted Sections 204 and 205 of the DGCL, which served to clarify the state of the law in Delaware and fill a perceived gap in the DGCL by providing new mechanisms for a corporation to unilaterally ratify defective corporate acts or otherwise seek relief from the Court of Chancery.[iv]

While both Sections 204 and 205 were intended to remedy the same underlying issue and provide a clear process for ratifying or validating a defective corporate act, the mechanics set forth in the respective sections take disparate routes to arrive at the intended result:

  • Section 205 provides a pathway for ratification that runs through the courts, allowing a corporation, on an ex parte basis, to request that the court determine the validity of any corporate act.
  • Section 204, on the other hand, is considered a “self-help statute” in the sense that the procedural mechanic provided for in the statute allows a company to ratify the previously defective act unilaterally, without the time and expense involved with petitioning the court for validation of the corporate act in question.

In the case of early stage companies, the expenditure of the heavy costs and valuable time associated with seeking validation in the Court of Chancery render Section 205 a less than ideal tool for curing defective acts. This post therefore focuses on Section 204, which provides a far less onerous mechanic for ratifying defective corporate acts, allowing a corporation to cure past errors “without disproportionately disruptive consequences.”[v]

Section 204 in Practice

Section 204 provides Delaware corporations with a procedure to remedy otherwise void or voidable corporate acts, providing that “no defective corporate act or putative stock shall be void or voidable solely as a result of a failure of authorization if ratified as provided in [Section 204].”[vi] Pursuant to Section 204, a corporation’s Board may retroactively ratify defective corporate acts by adopting written resolutions setting forth:

  • the specific defective corporate act(s) to be ratified;
  • the date on which such act(s) occurred;
  • the underlying facts that render the act(s) in question defective (e.g., failure to obtain the authorization of the Board or inadequate number of authorized shares); and
  • that the Board has approved the ratification of the defective corporate act(s).

Additionally, if a vote of one or more classes of stockholders was initially required to authorize the defective act at the time such act was taken (e.g., the approval of a majority of the Series A preferred stockholders in the case of an act that falls within the purview of the Series A protective provisions), then ratifying resolutions of the relevant class of stockholders are also required in order to cure the prior defect in the corporate act.

In sum, founders and their Boards should, at minimum, undertake the below listed procedural steps* in order to ensure that otherwise defective corporate acts are cured and ratified in the manner prescribed by the DGCL.

  • A resolution by the Board setting forth (i) the defective corporate act to be ratified, (ii) the date of the defective act, (iii) if shares or other equity is involved, the number, class and date of the equity issuance, (iv) the reason for the defect, and (v) the approval and ratification by the Board of the defective corporate act.
  • Approval of the stockholders or a particular class of stockholders (in the form of a written consent) if such an approval was required at the time of the defective corporate act.
  • Proper notice of the ratification sent to all stockholders (including stock that may have been invalidly issued). The notice must include a copy of the ratifying resolution/consent and an explanation that any claim that the ratification in question is not effective must be brought before the Court of Chancery no later than 120 days from the effective date of the ratification.
  • In certain circumstances, the filing of a “Certificate of Validation” with the Delaware Department of State to cure the defective corporate act being ratified (e.g., if shares were issued without filing the necessary Certificate of Amendment to increase the authorized shares of a corporation).

*This list should not be considered all-inclusive. Each situation is unique and further actions may be required depending on the underlying facts and the cause of the defect in question.

Startups represented by seedling growthTakeaways

The potential adverse impact of an uncured defective corporate act cannot be understated. For an early stage company seeking to raise capital from venture investors or other outside parties (or eventually exit through an acquisition), the risks associated with such defective acts are particularly acute. As a practical example, a corporation’s failure to observe the proper procedures in the election of a director can result in the invalidation of such election. In the event of such a defective election, actions taken by, or with the approval of, the improperly elected Board may be void or voidable. This or other defective corporate acts may result in the corporation being in breach of representations and warranties in any number of contracts, including stock purchase agreements executed as part of a financing round or M&A transaction.

Generally speaking, relatively extensive due diligence is typically the first step in all venture financings and other major corporate transactions. As part of this process, counsel for the investor or acquiror will undoubtedly review all material actions of the company along with the corresponding Board and stockholder consents as a means of “tying out” the company’s cap table. Any defective corporate act that was not later ratified by the company in accordance with Section 204 or 205 will at best need to be ratified or validated in advance of the closing of the transaction, and at worst may result in either (i) a reduction in the company’s valuation due to the perceived risk that past actions are ultimately void or unenforceable, or (ii) in extreme situations, the abandonment or termination of the transaction.

In an ideal world, companies of all sizes would always observe the proper procedures in authorizing corporate acts and ensuring that all other necessary steps are taken to ensure the validity of such actions. Unfortunately, in the fast-paced and often frenzied world of a startup, certain “housekeeping” items occasionally fall by the wayside. Upon the discovery of a defective corporate act by a company or its counsel, it is vital that the proper ratification procedures be undertaken in order to ensure that any and all past actions that could potentially be rendered defective are rectified and ratified in accordance with Section 204 (or in some cases Section 205) of the DGCL.


[i] A “defective corporate act” includes any corporate act or transaction that was within the power granted to a corporation by the DGCL but was thereafter determined to have been void or voidable for failure to comply with the applicable provisions of the DGCL, the corporation’s governing documents, or any plan or agreement to which the corporation is a party. See 8 Del. C. § 204(h)(1); See also, e.g., Blades v. Wisehart, C.A. No. 5317-VCS, at 8 (Del. Ch. Nov. 17, 2010) (requiring “scrupulous adherence to statutory formalities when a board takes actions changing a corporation’s capital structure”); STAAR Surgical Co. v. Waggoner, 588 A.2d 1130, 1136 (Del. 1991) (“stock issued without authority of law is void and a nullity”).

[ii] See, e.g., Blades v. Wisehart, C.A. No. 5317-VCS, at 8 (Del. Ch. Nov. 17, 2010) (requiring “scrupulous adherence to statutory formalities when a board takes actions changing a corporation’s capital structure”); STAAR Surgical Co. v. Waggoner, 588 A.2d 1130, 1136 (Del. 1991) (“stock issued without authority of law is void and a nullity”).

[iii] Id.

[iv] See H.B. 127, 147th Gen. Assemb., Reg. Sess. (Del. 2013): “Section 204 is intended to overturn the holdings in case law . . . that corporate acts or transactions and stock found to be “void” due to a failure to comply with the applicable provisions of the General Corporation Law or the corporation’s organizational documents may not be ratified or otherwise validated on equitable grounds.”

[v] In re Numoda Corp. S’holders Litig., Consol. C.A. No. 9163-VCN, 2015 WL 402265, at 8 (Del. Ch. Jan. 30, 2015).

[vi] 8 Del. C. § 204(a).

Once you have made the decision to incorporate your business, and gone through the formation process, it can feel like your company is ready to take on the world. However, there is one important item that cannot be neglected: the minute book. A minute book is the living official record of a business and contains all of the important documents to reflect the business’ history.

Checklist
Copyright: mexrix / 123RF Stock Photo

Maintaining organized records in a minute book is critical for any business.  For example, when a company seeks a new loan, raises funds via new investors, or becomes the target of an acquisition, it must undergo due diligence and produce its minutes to prove it has complied with both regulatory and its own self-governing documents such as its charter and bylaws.

The minute book begins with a business’ incorporation documents, including its articles of incorporation and bylaws (or articles of organization and operating agreement, if it’s an LLC). As time passes, and if the minute book is properly maintained, it will contain the documents that, among other things: authenticate compliance with governing documents via board and equity holder consents; confirm the company’s officers, directors and/or managers, who may resign or be replaced from time-to-time; and substantiate the capitalization of the company by memorializing changes in equity ownership.  Having a complete and current record streamlines any due diligence process and increases the company’s credibility from the very beginning.

Furthermore, the minute book will contain the “minutes” from the company’s annual and special board and equity holder meetings. The minutes are a written description of what took place at the meetings and serve to memorialize the actions taken by those in attendance during the meeting.  These records are valuable for preserving institutional memory, ensuring compliance with the company’s constitutional documents, and substantiating board or shareholder actions and processes if challenged later.

A corporation that commits to maintaining its minute book can save substantial time, money, and stress when it is called for review. On the other hand, neglecting to document the corporation’s history as it occurs can leave the company stuck trying to piece together years, if not decades, of information when the pressure is on to produce the records.

Early stage companies are typically urged, and appropriately so, to ensure that their “charter documents,” specifically their certificate of incorporation and bylaws, are consistent with statutory requirements in their jurisdiction of organization, and reflect the short term and identifiable long-term objectives of the founding shareholders.  Many founders will search for “boilerplate” documents on the internet or other public sources, and as their enterprises grow, seek to modify those forms to cover such items as super-majority voting provisions, director removal provisions, etc.  Issues may arise, however, where those modifications are not consistent with statutory requirements.

For example, the Delaware Court of Chancery recently held in Frechter v. Zier, C.A. No. 12038-VCG, that a bylaw provision requiring supermajority stockholder approval for the removal of a director was inconsistent with Section 141(k) of Delaware’s General Corporation Law.  Section 141(k) provides that (other than in cases of staggered boards or cumulative voting) a director may be removed with or without cause by a majority of the voting stockholders.  While some provisions of the DGCL are based on a default rule that applies “unless otherwise provided in the certificate of incorporation or bylaws” the Court of Chancery held the majority standard set forth in Section 141(k) could not be modified by a bylaw provision.

The lesson taught by this decision is that it should not be assumed that statutory requirements may always be modified by inclusion of a contrary provision in a corporation’s certificate of incorporation or bylaws.  The starting point should always be a clear understanding of the statutory requirement.  The next step in the analysis is whether the statutory requirement is subject to modification within a corporation’s charter documents, and, if so, where that modification must be set forth in order to be enforceable.  In making this analysis, the different processes for how a corporation’s certificate of incorporation may be amended as compared to an amendment to a corporation’s bylaws must be considered.  In this regard, it should be noted that Section 102(b)(4) of the DGCL allows a corporation to include a provision in its certificate of incorporation that requires a supermajority vote for any corporate action.

Early stage companies, when drafting and amending their charter documents and considering such issues as general voting provisions, director removal, approval of corporate actions such as mergers, asset sales and dissolutions, should give appropriate thought to how the applicable statutory provisions require those issues to be addressed. Doing so will avoid statutory challenges to the validity of those actions in the future.

Most successful startup companies will eventually mature to the point where they need to raise a round of institutional venture capital. Such companies face an important decision: whether to seek VC from an east coast or west coast firm. Although the answer will often depend upon the startup’s geographic location and industry, emerging growth companies need to understand that there are many key differences between west coast and east coast investors.

Copyright: ar130405 / 123RF Stock Photo
Copyright: ar130405 / 123RF Stock Photo

One important distinction lies in the concept of participating preferred stock, a deal term more commonly found on the east coast. Participating preferred refers to preferred stock with a special liquidation preference. In a deal with participating preferred stock, investors will receive full return of their investment before any other money is paid out, and then also ‘participate’ in the distribution of the remaining proceeds, up to an agreed upon multiple (often 2x or 3x) of the investment.

As an example, consider a VC with a 3x participating preferred invests $10 million in your company for a 50% stake. If you later sell the Company for $50 million, a common, but misplaced, expectation would be that the VC would receive $25 million, equal to their 50% equity stake in the company. In reality, the VC will get their $10 million investment back, and will then receive an additional $20 million (50% of the remaining $40 million). This gives the VC a total of $30 million, or 60% of the sale proceeds.

As you can see from this simplified example, participating preferred stock effectively reduces the amount of money left for the founders and executive team. As such, emerging companies should recognize that participating preferred is an important deal term that requires careful negotiation. Failure to do so will often result in investors receiving a far greater share of sale proceeds than the founders intended.

As chairs of the American Bar Association Business Law Section’s subcommittee on Angel Venture Capital, Fox Rothschild is undertaking an ongoing analysis of early stage convertible notes and their current market terms. Over a series of blog installments, we will analyze the state of the market and present results of the subcommittee’s informal national survey of convertible note term trends.

As Fox Rothschild attorney Alexander Radus noted in our first entry in this series, convertible notes offer advantages to priced equity rounds for early stage companies- faster and cheaper to close, fewer terms to negotiate, and the ability to delay the ultimate question on the valuation of the company.  But once a Founder has resolved to raise capital on convertible debt, the inevitable question they face is “what are the market terms on the economics for a convertible note round?”

In September 2015, Fox Rothschild conducted an informal national survey of 24 attorneys leading private equity and venture capital practices.  Respondents included lawyers from the west coast (3), the southwest (1), the midwest (3), the southeast (2), and the northeast (15).  One goal of this survey was to quantify market economic terms on several of the most common features of convertible notes.

Like traditional loans, convertible notes accrue interest and have a maturity date.  However, unlike traditional loans, convertible note capital raises assume that a priced round of equity financing will follow the convertible note financing, typically termed the “Qualified Financing” (e.g., a new money Series A investment of $1 million).  When the company closes the Qualified Financing, the note debt converts into preferred stock along with the purchase of Series A by the new money investors.  Although there’s variation among structures, convertible note investors have, over time, established a market set of mechanisms to compensate them for their earlier and riskier investment- the “Discount” and the “Cap”.

  • Discount. Notes typically convert at a discount (e.g., 10-30%) to the price paid by the new Series A investors. This results in investors converting the principal and interest of their notes at a lower price than the purchase price paid by the other Series A investors, thus receiving additional “bonus” shares in the Series A round.  Founders want to negotiate the lowest Discount possible.
  • Cap.  Although the Discount is a great feature for “juicing” the number of shares a noteholder receives in the Qualified Financing, investors often also negotiate a valuation “cap” on the pre-money valuation at which the notes will convert. Caps provide a backstop on runaway increase in value of the company for the purposes of calculating the conversion price of the notes.  The Cap ensures that if the company’s pre-money valuation in the Series A round is higher than the Cap, the note converts at Capped valuation.  In effect, this guarantees the minimum number of shares the noteholder will get on conversion in the Qualified Financing.  Founders want to negotiate the highest Cap possible, or even better, no Cap at all.

Typically, noteholders have the right to convert their note at the lower of (a) the conversion price determined by applying the Discount and accumulated interest to the pre-money valuation or (b) the conversion price determined by applying the Cap. For example, on convertible notes with a 20% discount and a $4 million valuation cap, the noteholder would receive a 20% discount on the Series A price up to a valuation of $5 million, and if the Series A investors are paying a price per share based upon a valuation higher than $5 million, the convertible notes will convert at a discounted price per share based upon the $4 million valuation cap.

Cap and Discount, therefore, are two of the main economic terms Founders and investors negotiate when offering notes.  So, what’s market?  Each of our survey respondents confirmed the Discounts and Caps on their five most recent convertible note financings.

Blog 1 Blog 2

A few interesting points based on these survey results:

  • While Discount shows strong center at the “standard” 20% (28% of deals), a surprising number of deals (16%) reported no Discount on the offering.
  • Nearly a third (30%) of note deals indicated “uncapped notes”, highlighting a market deviation from what most would consider as a “standard” feature; perhaps the growing number of “unicorn” companies (private emerging tech companies achieving a +$1B valuation) has given Founders leverage to eliminate the Cap feature from note offerings.
  • For those note offerings that include a Cap, almost all Caps are at or above $3mm- a good sign for Founders typically raising their first round on convertible notes.

In addition to these economic terms, the survey produced insights related to timing of the offerings, alternative “convertible equity” offerings, and other unique features, which will be discussed in our next installment in the series.

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’re421837-throw-on-a-floor-photo-with-paths 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

The IMPACT 2015 Capital Conference2015 IMPACT Capital Conference, one of the most established venture conferences in the Northeast, will be held on November 3 and 4, 2015 at the Ritz-Carlton Philadelphia.  As a premier signature event of the Greater Philadelphia Alliance for Capital and Technologies (PACT), the IMPACT Capital Conference has a long tradition of uniting key players from the private equity, venture capital and entrepreneurial communities.  IMPACT draws more than 1,000 participants and has been the catalyst for billions of dollars in venture funding and entrepreneurial success.  The conference will highlight emerging markets, capital resources and innovation in the region, continuing the tradition of connecting capital and companies.  This year’s event has a robust agenda with keynote speakers such as Internet entrepreneur and Kynetic founder and CEO Michael Rubin, and serial investor and co-founder of Franklin Square Capital Partners David Adelman.

Of particular note is the “200 for $200” program being offered to entrepreneurs.  The first 200 early-stage entrepreneurs who register for the conference can attend for only $200, representing an 80% discount off of the normal registration rate.  The IMPACT Conference is a great way for entrepreneurs and their companies to learn about the funding landscape in the Northeast and to make valuable connections.  We highly recommend taking advantage of this program by registering here and we encourage you to learn more about the conference.