Why Venture Capitalists Don’t Sign NDAs
Venture Capitalists (VCs) and angels rarely sign non-disclosure agreements (NDAs). Rebel One Ventures follows the same policy of not signing NDAs for the investment team when we speak with startups. This post explains why this is the norm in the industry and how as a founder you can protect your intellectual property.
1. Not signing NDAs is the norm
More seasoned Venture Capitalists than I have done an exceptional job at explaining why investors usually don’t sign NDAs. I will lead with their articles.
Why Most VCs Don’t Sign NDAs by Brad Feld, Co-Founder of Techstars, Investor for 20+ years in companies such as Zynga, MakerBot, and Fitbit
Why VCs Don’t Sign NDAs by Fred Wilson, Founder, Union Square Ventures, VC for 30+ years in companies such as Coinbase, Carta, Cloudflare, Kik, Soundcloud, Foursquare…
The Venture Capital Wishlist by Guy Kawasaki, early employee of Apple, VC for 20+ years in companies such as Pandora Radio, Tripwire, The Motley Fool and D.light Design.
“Never ask a venture capitalist to sign a non-disclosure agreement (NDA). They never do. This is because at any given moment, they are looking at three or four similar deals. They’re not about to create legal issues because they sign a NDA and then fund another, similar company–thereby making the paranoid entrepreneur believe the venture capitalist stole his idea. If you even ask them to sign one, you might as well tattoo “I’m clueless!” on your forehead.” — Guy Kawasaki
2. Reviewing NDAs for all startups is unrealistic
According to Sean Jacobsohn of Emergence Capital a VC reviews, on average, 120 deals for every single investment they make. Let us say a $75-100M fund with a team of 5–7 people makes 20–25 investments a year. That is 2,400–3,000 startups reviewed. Assuming each NDA is 2–3 pages and takes 30–60 minutes in total to review by someone on the investment team and a lawyer. On the upwards of 2,000-3,000 hours reviewing legal documents or in other wards 1–2 people dedicated solely to NDA review not accounting for term sheet review, sourcing startups, or most importantly helping portfolio companies scale.
This estimate does not account for tracking agreements across NDAs over time, which gets exponentially more complex with each additional NDA. Most venture firms are small teams and this administrative burden of reviewing, signing, tracking, and maintaining NDAs is unrealistic.
3. Saves time — for the startup and investor
For early stage startups with lean teams and companies that have not yet found product market fit (repeatable sales) — dedicating an extensive amount of resources to administrative overhead and legal processes may not make sense early on. If a founder is pre-revenue or has not created a repeatable sales process there is a high probability that the business will ‘pivot’. If that is the case, the founder may be spending precious time and resources protecting ideas that will likely change.
In addition, the likelihood of having an idea stolen, while possible, is highly improbable. For more on this check out my previous blog post on the four rookie mistakes of first time founders. Lastly, NDAs need to be enforced by the startup. If the startup is early on, this requires more time and energy from the team.
While getting an investor to sign an NDA is unrealistic — there are ways you can protect your intellectual property. Examples of sharing ’sanitized’ versions of your information include: having financials and your defined pipeline of customers with real data, but replacing customer names with ‘Customer 1, customer 2, ect.’ and not electronically sharing specific instructions that would enable someone to recreate your product.
Example —I advised an alternative energy startup that created a process to turn plastic into fuel. With two PHDs on the team, they had a strong leaning toward ‘overthinking’ things — they were worried someone would steal the idea. We reviewed their pitch deck together. In explaining their solution, we removed details of the ‘mixture’ that decomposed the plastic into fuel, but left the over all diagram with the sources of plastic and fuel outputs. Next step was documenting the process showing (via video recording) that combining the additive with plastic did break it down into sub-components. This worked for reviewing with investors.
Ideas are important, but execution is harder — founders should focus on conveying what the product is, what the solution is, showing they have customer traction, and that they know how to deliver. Investors are not looking to steal ideas — they are interested in verifying if founders are telling the truth, knowing where they are in the development process, understanding what they know and don’t to gauge the risk of the investment to ultimately invest in growing companies and helping founders accelerate to exit.
Best,
