When should founders ask investors to sign an NDA?

Before I start I want to point out that none of this is legal advice. I have no legal training, nor do I intend to provide advice about protecting your IP. The purpose of this article is to help explain how investors think. Hopefully it will help you avoid errors that, I'm sure, have cost other founders many millions of dollars in lost investment.

NDAs are massive red flags to startup investors. Signing an NDA before looking at a potential investment makes no sense. We see so many deals that it would be impossible to remember what information was sensitive and what wasn't. We would be in constant danger of being in breach of an NDA, without even knowing it. This is a risk no investor is willing to take.

What's more, for two reasons, there's no need for us to sign anyway:

Firstly, we have no intention of stealing someone's intellectual property. Most investors are either professionals or high net worth individuals. These are groups that have no reason or incentive to steal from you. Many of us also depend largely on our reputation. Why would we jeopardise our name, our ability to raise money for our next fund, and our honour simply to get hold of your IP? It seems to us that either you haven't thought this through, or you're overvaluing your idea. Either way, it makes you look naive.

Secondly, there are literally thousands more deals for us to look at, which don't require us to sign an NDA. We can therefore avoid the NDA issue easily with a quick, "thanks, but no thanks" and delete your email. Many investors won't even reply.

If you're worried about someone stealing your idea, there are other ways to protect yourself. For starters, limit the number of people you share with. Instead of asking for NDAs, simply filter out investors you're wary of.

In venture capital, NDAs are all about timing.

If you're a startup founder, or thinking about becoming one, it's likely that you've heard people advise "never ask investors for an NDA". The word "never" here is a little misleading.

It's true that you should never ask an investor to sign an NDA before you send them information about your business (i.e. before your first meeting). This will make you appear naive and unprepared, and investors will never sign it anyway. You must send at least a synopsis, and ideally an introductory deck (i.e. 10-12 slides), which explains what you're working on, and will entice investors to take a meeting with you.

It is not true, however, that you can never ask a VC to sign an NDA. Once you've gained their interest, and agreed to dig deeper, introducing an NDA is far from unusual. If you have created some highly sensitive intellectual property, it's absolutely right that you should want to protect that.

The key is when.

How and when to discuss NDAs with investors.

Here are some do's and don'ts about NDAs in startups:

1. The timing of an NDA is crucial. You should only mention an NDA after your first call or meeting, and once the investor has shown firm interest.
2. Most investors are swamped with deal flow. They are desperate for you to give them a reason to delete your email. Asking for an NDA is the perfect excuse.
3. You need to be clear about what information needs protecting, and what doesn't. Don't try to protect the entire idea; most of that is narrative. Differentiate between general information and IP.
4. NDAs should be discussed, never demanded. You need to explain what information you'd like to share, and why you believe it's highly sensitive. Based on this explanation, ask how the investor feels about signing an NDA, and at what point they might be willing to do so.
5. Note: your business idea is NEVER highly sensitive data. Many founders make this mistake. If you're worried about sharing too much, just simplify your story, or remove some of the detail. Give away enough to explain why this opportunity is exciting, but don't give away your trade secrets.
6. Investors have no interest in stealing your idea. Can you think of a single example of this happening? Don't fret too much about a problem that doesn't exist. There are plenty of other things to worry about - like finding someone who likes your business enough to invest!
7. If you're genuinely worried about someone stealing your idea, there are other ways to protect yourself. The most obvious of these is to limit the number of people you share with. Instead of asking for NDAs, just filter out any investors you're wary of.

I hope this helps you avoid putting off your potential investors, and gives you a useful framework for introducing an NDA into the conversation. Remember that investors are people, who probably want the best for you. Don't get defensive or adversarial. Be open, honest, and ask the investor how they like to operate.

Good luck!

Image credits

– Signature image by Romain Dancre.
– Never photo by DS stories.