Lesson 14: Why Investors Don’t Sign NDA’s

Why VCs and Accelerators Do Not Sign Non-Disclosure Agreements

Founders of start-up companies often ask why VCs and Accelerators do not sign Non-Disclosure Agreements (NDAs). Founders see NDAs as legal protection for their ideas that fuel their start-ups. They do not want a VC or an Accelerator to go off and tell competitors (or would-be competitors) about their idea. Sounds reasonable, right? Well, not to VCs and Accelerators. They do not want to sign an NDA.

The reality for VCs and Accelerators is different. For example, VCs are usually looking at any given time at multiple deals that are similar to each other. The founder/CEO of one start-up does not know what the founder/CEO of another start-up is saying. It could very well be quite similar, but if the VC chooses to invest in one company, and not the other, then the founder who was passed over will likely believe the VC stole his idea, even though it was not the case at all. As you can imagine, this misunderstanding can result in a big problem.

Simply put, a VC does not want to create a legal issue by signing an NDA. Neither does an Accelerator, which is hearing the ideas and pitches of many start-ups. VCs and Accelerators spend hours every day listening to new ideas and start-up pitches. Many of these ideas can be somewhat similar to those of other applicants. To this end, while the founder of a start-up may think his idea is so innovative and “no one else has ever thought of this,” it is entirely possible that someone else has thought of it and is already far more advanced with the idea.

In any case, a VC does not want to be held back by a legally-binding, enforceable contract that can hamper their ability to invest in new companies. Remember that VCs are in the business of making money for their investors by investing their money into promising start-ups. The last thing a VC want is a limited deal flow as a result of an NDA, for this can negatively impact their business prospects.

This is not meant to be discouraging for you, but rather to point out that many start-ups can be similar, so what is ultimately important is what differentiates them. An NDA is not going to make a start-up more differentiated. The quality of the pitch, the sound financials and the traction are what count. Moreover, ideas are cheap; they’re a dime a dozen. Odds are that there are several other people or start-ups in the world that already thought of your idea. What always separates these companies chasing the same idea is execution!

If you are adamant in asking a VC to sign an NDA, it shows, unfortunately, that you are either clueless, stubborn or excessively paranoid. It also suggests to potential investors that you have not taken the time to actually know them and understand their interests.

Another reason that VCs and Accelerators decline to sign NDAs is that the process to sign and fully execute an NDA is very involved and complicated. You have to go back and forth on changes to the NDA, involving lawyers, who charge by the hour. The VC will end up spending more time working on the NDA than spending time talking to you as an entrepreneur. How productive is that?

The other thing about NDAs that many entrepreneurs don’t even consider is the managing of the NDAs. VCs and Accelerators would need to track all NDAs and be constantly up to date. It would create so much extra work for them. It would be difficult and time-consuming. Furthermore, even if an NDA were signed, there would be little chance that the NDA would be enforced if a VC ended up investing in a similar company. In large part, VCs and Accelerators view NDAs as a waste of time and paper. An NDA typically only makes sense when it involves a merger or acquisition, or when the stakes are actually very high for all parties involved.

The general rule of thumb is: If you think you have something that you think needs to be kept under lock and key so that no competitor finds out, then you do not tell the VC or Accelerator that part of your idea or your business. You can speak in more generic terms. However, in doing so you may lose the opportunity to articulate your differentiation. Even if sharing your idea will spark ideas in others, the way you implement your idea will be the thing to make you and your company standout. If you hide in imaginary “NDA land,” then no one will know you or your company.

So when a VC or an Accelerator turns down your request to sign an NDA, it’s not personal against you. It’s an opportunity for you to build trust with the VCs and the Accelerator. You will have an opportunity to get feedback and test your ideas. Don’t waste the paper that an NDA is printed on. The surviving trees will thank you and so will your potential investors.