4. Your Non Disclosure Agreement can poison the well for angel investment

I talk to a lot of founders who are worried about people stealing their ideas.

It seems to be a common concern and leads founders to ask everyone they talk with to sign non-disclosure agreements (NDA). For most startups I think the idea they are trying to protect is worth a lot less than they believe, but that is a topic for another day.

For now let’s look at the impact on fundraising and why investors are so resistant to signing NDAs. It really comes down to the number of businesses they see, which is a lot. Many of those businesses will be working in similar spaces or with similar business plans. It is almost impossible for investors to keep track of exactly what ideas or concepts came from each company, despite their best efforts. There is a real fear among investors that one company might accuse them of stealing an idea that was independently concocted by another founder, which would lead to expensive litigation. In addition, there is a significant paperwork and overhead cost to tracking NDAs and their associated information. Any covered information must be securely stored, tracked, and eventually destroyed per the requirements of the NDA.

Angels and VCs have a strong incentive to protect the information they receive. It would destroy their reputations if they made a practice of stealing ideas from the companies that pitch them. Their deal flow would quickly dry up. However, the risk and overhead of dealing with non-disclosure agreements from every company is far too high, and experienced founders know not to ask.

In fact, asking for an NDA before hearing a pitch is a clear sign that the founder is inexperienced, and can leave a black mark even before the first conversation.

Investors will sign NDAs if they become more actively involved in the business, if they become formal advisors or join the board of directors for example. At that point you really are showing them all the crown jewels and skeletons in company, and can expect them to protect that information.

But, at the investor pitching stage, NDAs are a barrier to getting a meeting and interest. It is hard enough to raise capital without throwing up unnecessary roadblocks.

Good luck with your fundraising and your business!

Till next time, ciao!