One of the most frequent questions asked by founders is ‘will you sign my NDA?’. This is an area of fundraising where the theory and reality are significantly different. Access to Finance specialist Ian Dixon considers the options for entrepreneurs and provides his insight on best practise.
An NDA is an acronym for Non-Disclosure Agreement and in essence is a legally enforceable contract drafted by a lawyer in precise and meticulous language. It creates a confidential relationship between a person who has commercially sensitive information to disclose and the person to whom the information is disclosed. It can relate to many types of ‘information’ - product, service, process and it must be signed by individuals with appropriate authority from both parties.
Typically, NDAs exist to satisfy three key functions:
- To protect sensitive information
- To help an inventor retain patent rights when developing a new product or content
- To specify what information is private and what is not
When working with entrepreneurs starting out and looking for finance, I encounter a number of common beliefs about NDAs.
Many entrepreneurs believe an NDA will help their proposition to be taken more seriously and professionally by potential investors, strengthening their negotiating position and preventing a potential investor from investing in the competition – a valid thought but not necessarily the case, as we will discuss later.
An NDA has the potential to protect an idea that has value, preventing a potential investor from networking and leaking information. Most entrepreneurs are aware of this, but the reality of being able to enforce an NDA and the potential cost is something that warrants serious consideration and may outweigh the benefits.
In my experience, investors don’t usually sign NDAs – and there are multiple reasons for this.
Investors value their time. Agreeing an NDA is time consuming, potentially expensive and a low return on investment activity. The possibilities of extra costs and liability are vast and unappealing. Reading and signing an NDA is a potential barrier before even investing valuable time in reading your pitch. The risk of legal action and potential damage to their reputation is a concern for most if not all potential investors. Lawyers may be required to review, and investors would then have to track and monitor NDAs for future conversations. Investors are usually focusing on triaging deal flow and stage one is whether you, as a potential investment, fit their investment thesis and requirements; NDAs can present a stumbling block too early in this initial process and can detract a potential investor.
It is very unlikely that an investor is going to steal your idea. Your secrets are not as secret as you think. Very few things are unique and very few ideas are unique to you as a founder. Ideas are plentiful, what investors are really looking for are market opportunities. In emerging sectors many start-ups are focussed on addressing the same or similar markets. The interested investor will naturally be reviewing similar propositions, and an NDA is simply too restrictive and creates an immediate trust red flag. You are implicitly telling the investor you don’t trust them, which is not a great start to what could be a very long relationship.
Investors know NDAs are exceptionally difficult to enforce and so are not worth the PDF they are digitally signed in. It will be perceived as a naivety on the part of the founder and acts as a signal as to whether any basic research on the fundraising process has been undertaken and if the founder is taking it seriously. Perversely, it implies your idea and what you have done are more important than what you will do in the future. Where you start and end may well be very different. Start-ups often make big pivots and / or focus on new market opportunities. Investors know you will change and the value of an idea is limited. It’s only what you execute that matters.
- Research target investors carefully to evaluate their credibility and ensure you review existing portfolio companies prior to any approach. Specifically check if they have invested in your sector and potential direct competition already.
- Seek independent and impartial advice where possible from professionals with experience and knowledge of investors and funding processes. Ask for a ‘warm’ introduction to a named contact.
- Watermark your pitch-deck. Alternatively, include a footer or header on each page detailing, “Strictly Proprietary and Confidential. Please do not distribute. Prepared for XXX”.
- Send a ‘teaser’ deck or investment summary first. If the investor is interested, you can have a conversation or meeting and share further information later.
- Use a platform to upload / send your pitch-deck where you share a link with a potential investor which has the benefit of analytics. This will allow you to track who read your deck, for how long and potentially prevent downloading and sharing.
- Assume what you share will be shared, don’t share anything you don’t want the world to see.
- You can phase what information is shared. Raising money is a process with a number of stages. You can progressively share more information as the investor conversation develops and actions moves towards investment.
- Don’t share confidential information until you need to.
- You can ask for an NDA only where you have a deeply technical or unique competitive advantage. Typically, this is at a late stage of the due diligence process and following the issue of an indicative terms sheet.