NDAs: Safety Net or Self-Sabotage?
Startup founders regularly ask us to sign non-disclosure agreements (NDAs). We never do. In fact, like almost every VC, we have a firm policy against signing them. But this doesn’t stop founders from asking — and I think doing so is a big mistake.
Here’s the typical email exchange:
Founder: I’d like to tell you about our exciting startup.
Me: Great. Please send me your deck and I’ll let you know if it looks like a fit for us.
Founder: Please sign the attached NDA and I’ll send you the deck.
Me: We don’t sign NDAs.
Founder: No worries. I’ve attached the deck anyway.
“So, what’s wrong with this?” you may ask. A lot. For one, it gives off an air of inexperience and weakness. Plus, it’s a sign that the founder is probably not very good at fundraising. But on a deeper level, it’s an indication to me that the founder does not understand what it takes for a startup to succeed.
I understand the intention behind sending an NDA. You’re excited about your company and want to protect it. But it’s important to understand what sending an NDA reveals about you.
Founders who ask for NDAs before sharing their pitch deck must believe that they have an idea that is so revolutionary and so amazing that I would be willing to drop everything and start a company to compete with them. Or that I will share their revolutionary idea with one of their competitors. Of course, I would do neither. Reputation is especially important to VCs. No one wants to work with a disreputable investor. As a result, it is very unlikely that a VC would share your deck without your permission even if they don’t sign an NDA. Bottom line: only pitch investors who have a good reputation and whom you believe you can trust.
The truth is that almost no company succeeds because of the idea and plan contained in their pitch deck. The only way a company succeeds is by relentlessly executing and by constantly evolving and innovating to meet its customers’ needs. So even if you have the best idea in the world, you won’t succeed unless you execute. Execution is the key. And if you are executing well and meeting your customers’ needs, you will win even if others know your plan, your revenues, your sales channels, your strategy and your secret sauce. Smart execution trumps great plans every time. And the truth is that there really are very few revolutionary ideas anyway.
Requesting that an institutional investor sign an NDA is a sign of naiveté. Maybe angel investors will sign them, but VCs won’t. Why? Because we see so many deals that signing a separate NDA for each would be both unnecessary and infeasible. For VCs, lack of deals is never a problem. If you erect hurdles for investors to even read your deck, to understand what your company is all about, they are just going to move on to the next deal. And remember that we review hundreds of deals each month; trying to manage lots of NDAs would be ridiculous.
And NDAs aren’t just a hassle for VCs; they’re also a waste of time and effort for founders. Even if a VC does sign your NDA, it is highly unlikely that you will ever know if they violate it. And if they did, and if you could prove it, will you have the resources necessary to sue them? If you think fundraising is challenging now, try fundraising after you have sued a VC. Given these stark realities, having a signed NDA only gives founders a false sense of security.
Make it easy on yourself and increase your odds of getting an investment by forgetting the NDA. You are going to give the VC your deck anyway, so why even ask? If you truly have a revolutionary idea, or you are so concerned about your competitors knowing what you are up to, just exclude that sensitive information from your deck. Tell your story without revealing what you consider to be potentially damaging or proprietary information. Or describe it in vague terms. Your goal as a founder who is fundraising is to get to ‘yes.’ Don’t create hurdles; make it easier for investors to get excited about what you’re doing and want to learn more. And yes, it is possible to raise a lot of money without ever revealing your secret formula. Coca Cola and KFC never shared their secret formulas with potential investors and they were able to raise a lot of money. I don’t need to know your secret sauce — if customers are buying it, that’s good enough for me.
Phil Nadel is the Co-Founder and Managing Director of Forefront Venture Partners (www.forefrontvp.com). Follow him on Twitter: @NadelPhil or on Medium at https://medium.com/@pnadel.
