Why Startups shouldn’t worry about the NDA with VCs

One of the surprises I find from time to time in screening investment candidates is that I still occasionally got asked about signing an NDA before some entrepreneurs (sometimes their advisers) feel comfortable to share their business plan. While it’s never a bad thing to carefully protect the best interest for your company and shareholders, it is a common practice in the tech world where most of us VCs don’t sign any NDA. Brad Feld and Mark Suster has shared their thoughts on this topic since long time ago.

Although this topic has already been widely covered by many VCs in the U.S., I hope that my quick post here could provide some assurance to upcoming first-time entrepreneurs that while there can be some differences between VCs in each region, this is not one of them.

For a start, the most honest reason why investors don’t sign NDAs would be simply because they don’t want to — the money is in their pocket thus the higher negotiation power. In addition to the unnecessary extra workload on the VCs, the summary points below should help entrepreneurs better understand the rationale why NDAs are not really necessary for either side.

• Decent VCs will never steal your ideas. Very rare bad VCs will probably do, and entrepreneurs should not bother approaching them from the beginning. The venture community is a pretty small world and bad news always spread fast, so it shouldn’t take much effort for the entrepreneur to vet each investor’s credibility.
• We are investors, not entrepreneurs. Not every VCs are a born hustler, and above all people the entrepreneurs themselves should know the best that it is not that simple to steal an idea and build up a successful company. In fact, very few ideas are worth stealing without the right team to execute, and it’s our job to make investments in the winning ‘A’ team.
• Your idea is very likely not the world’s (or whatever your market) first. VCs generally assess and close a few deals from hundreds of applicants each year and it is very common to come across many similar companies competing in the same market. Signing NDAs would not only put VCs into the risks of possible legal actions but also making them technically unable to work at all. (imagine yourself reviewing the past 350 NDAs you signed before hearing every new pitch)
• NDA is not a magic box in the court. The sue will not simply work out that easy. Furthermore, entrepreneurs are unlikely able to spend their limited resources to proof a lot of things to make the case (e.g., the person did with full knowledge and there was no other means by which the person could had come across the information) instead of focusing on their survival.

So when will NDAs become necessary?

NDAs should be required if the technical due diligence (e.g., allowing someone to have a look at your source code or inner work) is requested, generally close to the final investment decision. Apart from that NDAs are used more often in M&A deals or any information-sensitive agreement with big corporates.

Other protection measures

Some protection measures entrepreneurs could adopt:

• Pitch practices — Revise your deck, practice your pitch to ensure you can convince your investors without needing to disclose all your secret sauce. Focus on your traction and metrics to demonstrate that your product actually works. Keep the information high-level enough to attract interest.
• Document encryption — Easy and seems unhelpful but from my experience this method has been considerably effective to a certain level. At least this is better than letting anyone open your document with a double click.
• Document sharing tools — There are many great tools you can use to control and track how you or other audience share your sensitive documents (even who, which page and how long is he viewing..) Try DocSend, PandaDoc or Digify.

Bottom line

Raising venture capital is all about trust and relationship. Approach good investors from the beginning so that you don’t feel the need of an NDA, and never be scared to share your ideas and receive feedback. Your team should be the best one to execute or else you shouldn’t start it in the first place.

This post is a part of my Venture Fundraising Basics series where I will try to share the fundamentals of raising venture capital for entrepreneurs and some local perspectives from my experience in Southeast Asia. For the complete outline and links to other posts, please visit here.

Note: All contents and opinions expressed in this story are humbly of my own and do not represent those of any of my current or previous employers.