I can’t tell you how many times I’ve had a startup push an NDA in my face. I get it – most startup founders are protective of their ideas. They believe that their unique invention or revolutionary business model will be stolen by anyone who learns about it.
While they may be right, the reflexive instinct to guard their ideas with NDAs is a deeply misguided strategy. Reputable VCs, consultants, and accelerators will almost never sign NDAs at the early stages of a relationship with a startup.
Reasons to Sign Startup NDA
There are a number of reasons for that.
Restriction on investment sourcing: Signing an NDA could limit a VC firm’s ability to freely seek out new potential investments in the same sector. If the information protected under the NDA is defined too generally, it could effectively prevent the VC from investing in a particular industry.
This creates a conflict of interest and could violate the investment fund’s obligations to their other portfolio companies and their own investors. For example, if a VC signs an NDA with a startup working on a specific technology, the agreement could potentially prevent the firm from considering similar technologies, thus limiting their investment portfolio and the potential returns to their investors.
Potential harm to reputation: High-quality startup investors rely heavily on their reputation when exploring investment opportunities. If an investor signs an NDA and then inadvertently discloses confidential information, it could damage their reputation in the industry.
Risk of inadvertent disclosure: The cost of implementing resources to ensure compliance with NDAs is very burdensome and would likely be prohibitive for smaller investors, mentors, and consultants. Additionally, the risk of accidentally breaching the NDA can create legal complications.
Risk of frivolous litigation: At the early stage, it is often unclear whether a company actually possesses breakthrough technologies, a go-to-market approach, or merely a fluffy business plan and ambitious team members.
By signing an NDA, a VC might unintentionally agree that all information disclosed by the startup is confidential, which can potentially lead to litigation for breach of confidentiality if the startup fails. For example, a failed startup might seek litigation against a VC firm as a last-ditch effort to recoup some money.
Conflicts of interest: VC firms often have advisory roles or board memberships in their portfolio companies. An NDA could create conflicts of interest. For example, if a firm’s principal is on the board of a portfolio company and learns of an opportunity or information that could benefit another portfolio company, the NDA might prevent this information from being shared. This situation can create a conflict between the principal’s fiduciary duty to the board and the obligation to the NDA.
As an entrepreneur, it is critical to see the world from the viewpoint of other members of the startup ecosystem. If someone eagerly agrees to sign your NDA, they are either not familiar with the startup world or do not fully understand the implications of the NDA.
They also may not be concerned with breaching it, either because they don’t have a good reputation to protect or don’t mind being involved in litigation. In other words, as counterintuitive as it might seem, the folks that sign your NDA can sometimes be the least trustworthy and useful ones.
Don’t do it When Signing NDA for Your Startup
If you insist on someone signing your NDA, what you are basically stating is that you are not a sophisticated founder and that you don’t fully understand what an NDA is. Ultimately, what you are saying is that you will be difficult to work with.
I am a founder myself, and I understand that you’re afraid your ideas will be stolen, but the NDA is not the right tool for this job. Don’t sink your relationships before they start and really consider the implications of that document before you ask someone to sign it.
