Wil Schroter
There’s a popular misconception amongst first-time entrepreneurs that sharing an idea without signing a non-disclosure agreement (NDA) will lead to some version of The Social Network, where Mark Zuckerberg, played by Jesse Eisenberg, steals the Facebook idea and becomes a billionaire.
The mythology sounds horrifying, but the reality is much different.
In short – investors don’t sign NDAs. They won’t sign your NDA. Asking them to will make you look like you don’t know what you’re doing, and there are a few reasons for that.
No One Wants Your Idea
You may have the world’s most amazing idea. It may be a complete pile of rubbish. Either way, it’s not about ideas.
Investors want entrepreneurs, not ideas. Anyone can come up with a great idea, but very few can actually pull them off.
It’s not that Mark Zuckerberg just happened to steal an idea for social networking. It’s that he was the most capable person to actually pull it off. It’s not like he was the first (Friendster, anyone?), or the first to be successful (Myspace, anyone?).
A clever idea may pique an investor’s interest, but that isn’t worth getting ahead of yourself and demanding a NDA. You’ve got plenty of other hurdles.
Don’t Make Life Harder
On average investors see 20 deals per week. That amounts to over 1,000 deals per year. Signing a NDA could potentially prevent them from having a meaningful discussion with any potential investment after yours.
Should they choose not to invest (and most won’t) they would be stuck with the liability of a legal contract with you that prevents them from finding more deals. There are literally no benefits for the investor to sign a NDA.
Now imagine you’re an investor looking at hundreds of deals. You find one that looks interesting and you reach out. The startup responds by saying you need to sign a NDA.
Do you go through the hassle of signing a NDA or do you just move on to the hundreds of other startups who aren’t asking for a document that no one ever signs? You can probably guess.
It’s hard enough to get an investor to pick you among hundreds of other deals. Don’t make your life harder by insisting on them signing a document that they don’t need to.
You Can’t Enforce It
The power of any legal agreement is proportionate to your ability to enforce it. Do you plan on suing investors in the near future? Do you think the power of the document you’ve asked them to sign will give you adequate grounds to enforce that suit?
Probably not.
Focus on what you can control, which is what information you show them and what aspects of the business you are willing to share.
Share The Cookie, Not The Recipe
If your idea is so easily stolen that just hearing the concept is enough to allow anyone to replicate it and launch it better than you, then you’ve already lost.
There is little protection in just a concept, so unless you’ve got a secret recipe behind it, signing a NDA doesn’t do you much good anyway.
You should be able to openly share the concept idea with anyone, since as soon as you launch everyone will have a taste of it anyhow. If there is a secret recipe behind the concept, then by all means don’t share that until you’ve gotten to know the investor better.
Very few ideas have a secret recipe, however, and you’re more likely to be explaining why you can defend this concept once it’s launched.
What To Really Worry About
All of that said, there are some things you should consider protecting as you shop your idea around to investors.
Investors who have investments in similar companies to yours could present a challenge. You are essentially providing them with competitive information that they are free to share with their other portfolio companies. Most investors will decline meeting based on those grounds in the first place.
The other thing to worry about is the dissemination of your information. Pitch decks and business plans can get shared incredibly easily. It’s helpful to have a method to grant and revoke access online if possible, or to only present the key documents in person on your own laptop.
If you’re going to worry about anything, worry about actually getting a meeting with an investor. You’re going to have plenty of challenges in attracting investors, don’t make forcing them down the NDA path one more reason to not get a pitch to begin with.
If you have some specific questions about using an NDA with investors, tweet at @Fundable and we’ll try to answer them.
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Michael Kull
This is an interesting assertion. As someone who has had ideas stolen, I wonder what research has actually been done to support this claim? It seems to me that the problem lies with the fact that most people with ideas and few funds have a difficult time actually going after someone who does behave unethically and gets away with it. So an ethical investor should understand this and be willing to do his or her pro forma due diligence just as he or she would expect the management team to do theirs. Would you invest in a company that had not asked its members to sign an NDA or non-compete clause? Highly unlikely. So I advise my business students, on either side of the table, to just do it. Makes everyone feel better even if they don't get enforced often, or often enough.