Monday, 4 November 2013

Why most VCs do not sign NDAs

By Godman Usman (Analyst)

Recently, I read an article titled NDAs: entrepreneurs vs. investors. Which might suggest that some kind of inevitable joust between entrepreneurs and investors will happen over the pedantic issue of signing a Non-Disclosure Agreement aka NDA. In reality that is not the case.

As an entrepreneur, NDAs quite rightly provide a practical way of protecting yourself against unlawful disclosures. Especially when in today's economy, the assets of many firms especially start-ups and growth companies are almost entirely held as intellectual property (IP), which itself is often IP protected as a trade secret. Without doubt, unlawful disclosures of trade secrets tend to have one inevitable outcome for a firm - a loss in intrinsic or material value.

It may seem counter-intuitive to all entrepreneurs out there , but asking your venture capital investors and professional advisers to sign NDAs prematurely, that is, before disclosing anything is considered a faux pas by the investor community (both here in the UK and in the States), as it comes across as either paranoia or naivete or a combination of the two.

Firstly, I'll explain why it is such a turn-off for investors in three parts:

Drafting NDAs is time consuming and a net expense for all investor(s) as it involves paying legal professionals to undertake client due diligence work.

Secondly, investors are cautious of legal documents such as NDAs since this automatically excludes them from listening to other pitches remotely similar to yours. So would an investor sign your NDA? the answer is most probably no, because they would be in constant violation since most investors (VCs) see a minimum of 3 firms within the same market sector. In practice however, they review hundreds if not thousands of business plans, teasers, executive summaries, presentations and other sensitive documents every year containing firm-specific trade secrets. Signing NDAs prematurely would be the equivalent to voluntarily parachuting from the sky into a landmine.

On a practical level it should be noted that professional investors also have reputations to keep, ironically their own IP is their reputation and network .

Indeed drafting NDAs is serious business, why, because, it involves putting into effect protocols and procedures which allow each party, both entrepreneur and investor, to supervise very carefully potential violations. Now imagine, if your deal with them doesn't materialise, the investor must be careful not to have been "contaminated" by privy information from your business for his or her existing or future clients with similar or competing propositions.

Finally, after all your hard work, do you really want to shoot yourself in the foot, after all you have been through! Instead put more thought into how you will execute your grand plan. Fundamentally, business is based on trust and measured risk. Kindly understand this risk from the venture capital providers’ point-of-view first.

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