Do VCs and angels ever sign NDAs?

QUESTION:

I have an idea I’d like to keep confidential. Do VCs and angels ever sign NDAs? How do I keep them from passing around my business plan? Or is this something I just shouldn’t worry about.

ANSWER:

Ethan Stone

Ethan Stone

by Ethan Stone, Stone Business Law

VCs and angels sign NDAs. They have to because a lot of intellectual property (trade secrets and potentially patentable inventions before you’re ready to file an application) can only be preserved by secrecy. What they generally won’t do is sign an NDA before they know enough to decide if they’re interested. The reason for that is that they are talking to lots of people about business ideas all the time. Signing an NDA before they talked to anyone about anything would unreasonably slow them down and would make it nearly impossible for them to keep track of what exactly they had to keep secret. Your idea is at the center of your universe, so it can be hard to remember that it could easily get lost in the shuffle for the VC who hears a hundred ideas a day.

All of that said, you’re concern is understandable and perfectly reasonable: If you tell your great idea to a guy who might be in a much better position than you are to realize it, what’s to keep him from beating you to the chase?

There’s no entirely satisfying answer to that concern, but here are a few thoughts:

First, reputable VCs (that’s not all of them) simply aren’t in the business of stealing people’s ideas. That’s not to say that something you tell them might not get them thinking. If they’re already backing a similar business, that could be very bad for you. But the established VCs trade on trust more than anything else. They need a steady stream of people trusting them with their ideas and can’t afford the hit to their reputation would suffer if they made a habit of betrayal. They’re also in a hurry and inundated with people pitching their ideas, which further lessens the chance they’ll take yours and ditch you.

Second, if you have any “secret sauce,” you should keep it secret until an NDA is signed. So try hard to come up with an elevator pitch and an initial presentation that gives enough of a taste of your cooking to whet the appetite without revealing the secret ingredients. Incidentally, it’s safest to do this in conjunction with a lawyer, since a big part of what you’re trying to do is to preserve your IP. Getting it wrong can be very bad. Many mistakes in this area just can’t be fixed after the fact.

Third, before talking to investors, it’s best to make enough progress in developing the idea and assembling the team that investors will be interested in what you’ve accomplished and your team’s potential, not just in the idea you’re chasing. “Wouldn’t it be cool if someone . . .” is a lot less compelling as an investment opportunity than “Isn’t it cool that we’ve . . .” Remember that professional investors are essentially passive. The good ones are hands-on and helpful to you, but they’re still coaches. They don’t want to run the ball. If you have not only the idea but also a strong lead in commercializing it and a good team in place to finish the job, they’ll follow the path of least resistance and invest in what you’re doing, rather than trying to steal your idea and realize it themselves.

Finally (this is a bit of a recap of the second point, but it bears repeating), understand that while some information must be revealed to potential investors before they’ll agree to sign an NDA, some information absolutely cannot be revealed, absent an NDA, without destroying important IP rights. In general, you should consult with a lawyer on the distinction, rather than relying on instinct.

Comments & Advice:
  1. Ethan Stone Ethan Stone says:

    Roger Ehrenberg wrote a great post on the topic of ideas and confidentiality today (http://informationarbitrage.com/post/1609554816/turning-ideas-into-companies). It's worth reading. One thing to bear in mind: Roger isn't a lawyer. There are things that you have to keep secret in order to maintain trade secret protection for them, but those are almost never the key elements of your business idea. They're the code, algorithms, novel materials etc. that won't be apparent to someone who buys your goods or uses your service.

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