Notes for Founders: Should You Use an NDA with Investors?
Here’s a scenario: You’ve come up with an incredible, sure-to-be-a-unicorn-within-record-time idea. It’s the idea of the century. You’ve even made progress – built something technical, made in-roads with clients, gotten an A+ team of advisors, and brought on a co-founder. You’re finally ready to hire a few employees, but you really need some money.
It’s fundraising time.
You sink hours, days, weeks into your pitch deck and presentation; you’ve been up late every night perfecting your one-pager; you’ve researched and identified the angel networks and venture groups which match your business. You're ready to apply.
But…you’re afraid. You can’t send them your idea – the idea of the century – without being absolutely sure they won’t steal your technical process. You’ve perfected the Uber-meets-Birchbox-meets-Facebook-meets-Amazon-meets-Dropbox for, well, you can’t say because you don’t want anyone to steal it.
[Related: The Old Way of Investing vs. The New Way]
You’re obviously smart, so you hire a lawyer to draft the perfect, airtight non-disclosure agreement (NDA) to protect your confidential information and send it to all the potential investors before you send them your pitch materials. Problem solved, right? This way no one can steal your confidential information without the long arm of the law coming after them.
But guess what: No one is going to invest in your brilliant idea if this is how you go about asking for money.
You, the founder of an early-stage company, and the investors to whom you wish to pitch, all exist in the same ecosystem. An investor who disclosed confidential information or stole the ideas of start-ups would not last long in this community. The truth is, investors - particularly early-stage investors - are not interested in stealing your idea.
In fact, most early-stage investors are more interested in you than your idea. If the investor likes your business plan and you are executing it well, the investor will exploit it by investing in your particular execution of it. That’s why they are investors: Their job is to give you money. Open your founder-investor relationship with trust; without it, you are bound to fail.
Remember that investors would have their hands tied if they signed NDAs for every company they reviewed. The time, legal hours, and compliance concerns would be so burdensome as to quickly put the investor under, preventing further investing.
But do keep in mind that highly-confidential and proprietary information should not be disclosed right away. Detailed technical information and sensitive client contacts have no place in a slide deck. As you proceed in diligence with an investor, you should constantly weigh the likelihood of an investment against your desire to keep your business practices or technical know-how confidential.
Of course, there are exceptions to this rule. I was talking with a founder recently who is in the process of creating a very specific medical machine for which there is not yet a filed patent. As this company navigates investors, it will be important to consider a limited NDA, appropriately tailored to the specific use with potential investors.
[Related: 7 Things You Need to Start Your Business]
Wendy Heilbut is the founding member of the New York office of Jayaram Law, a boutique Chicago-based firm. She specializes in soft IP, particularly trademarks, and general business law for early-stage companies.
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Attorney and angel investor whose legal expertise bridges the gap between traditional law and innovative growth. In addition to advising early stage companies, she is a leader in managing domestic and international trademark portfolios, cross-border trademark strategies and the intellectual property direction for innovative companies large and small. As the first partner and founder of Jayaram Law’s New York City practice, Wendy has worked with such visionary companies as Rebecca Minkoff’s FCC, Refinery29 and Ankura... Continue Reading
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