If you’ve tried to get an investor to sign a nondisclosure agreement (NDA) before you pitch them, you’ll often be waved off with something like, “We don’t do that.”
That is somewhat sensible: Investors talk to a lot of startups, so signing an NDA could open them up to liabilities in many ways. For example, an investor could agree to not share anything you’ve disclosed, but it’s possible they heard another startup doing exactly what you do, with exactly your approach a couple of weeks before they spoke to you. That puts them in an awkward position.
This practice is therefore so widespread it’s become something of a rule.
As a startup founder, you really need to understand how venture capital works
There are times when you should push back against such conventions, though: When you’re discussing the details of your technology.
If an investor says they don’t sign NDAs, here’s what you should do: Take the meeting anyway but move the slides that talk about your technology to another part of the presentation deck, behind an interstitial slide saying, “Beyond this point, an NDA is required.”
Your job as the founder — using the market size, your unique team and traction — is to tell enough of a compelling story that the investors choose to sign an NDA ahead of your next meeting.
Here’s why you might need an NDA
Investors play a pivotal role in the trajectory of a startup not only by providing financial support but also by lending their strategic expertise. But they do need to evaluate whether the investment makes sense for them via deep due diligence on the market, your team, and the problem you are solving. That process often includes asking experts to evaluate the thing you are building.
If your solution or product is patentable, but you haven’t yet got one, for the love of all that is holy and dear, do not share the details of your tech with anyone outside your company who hasn’t signed an NDA. Doing that is as good as putting your head in the lion’s mouth and praying it won’t bite.
“Investors are talking to other companies and they’re looking for other investment prospects. Most people don’t do things for a nefarious purpose, but you can’t unring the bell,” said Michele Moreland, GP at IP-focused investment firm, Aventurine.
“The one thing I’ve seen in my career is that a lot of the most important inventions seem obvious. They are what we call an ‘elegant solution.’ Once someone sees it, they react with ‘Duh! Of course! That’s how you do it!’”
Once someone has that aha! moment and realizes that a solution is the “right” way to solve a problem, it becomes hard to think of another way of doing so.
This means you don’t even have to change that many details about a solution to lead someone to an elegant solution. That is why it is crucial to not even outline your solution as part of the pitch. Get an NDA in place; then you can talk without worrying about leakage.
What does an NDA do?
An NDA safeguards the startup’s proprietary rights. Startups are often built around a unique business model, product or service that distinguishes them in the market. Intellectual property (IP), including patents, is at the heart of this distinction.
Also, an NDA prevents the unauthorized dissemination of this sensitive information, effectively protecting the startup’s competitive advantage and potential market value. An investor with knowledge of a startup’s patented technology or pending patents could theoretically share this information, either inadvertently or intentionally, which could lead to disastrous consequences for the startup.
Another aspect that’s less commonly discussed but is equally important is that signing an NDA builds trust and confidence between the investor and the startup. It demonstrates the investor’s respect for the startup’s intellectual property and the seriousness of their intentions. This not only sets up a solid foundation for their future working relationship, but it also signifies a recognition of the startup’s value, which can influence other investors positively.
Remember that many specialist investors’ portfolios may encompass multiple companies in the same or overlapping sectors. Here, an NDA can prevent conflicts of interest and ensure that the investor is not accused of sharing confidential information among their portfolio companies.
It becomes a line in the sand, where you can look each other in the eye and say, “Okay, we’re going to share something sensitive with you. From this point on, we need mutual trust.”
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