Is your NDA doing more harm than good for your startup? Here are 5 reasons Angel and VC funds avoid NDAs.
You have found the Angel fund of your dreams. They invest in the sector in which you operate, at the stage of development that your company occupies and within the level of investment you are seeking. The conversation is going great. They appear genuinely interested and request additional information.
You enthusiastically respond, “I’d be glad to share company details! However, I’d like to forward you a Non-Disclosure Agreement (NDA) first.”
*crickets chirp* The mood shifts. The fund manager is silent. You immediately think, “What just happened?”
A LOT JUST HAPPENED!
If the fund manager represents an angel fund with a solid history of investment and an impeccable reputation, you may have just insulted the fund AND her/him personally. Angel groups and VCs operate in a tight knit industry. They work hard to build and maintain strong reputations of integrity. Without that, entrepreneurs would not be interested, and their deal flow would dry up.
Angel & VC Funds are investors, NOT competitors.
They invest in startup companies and therefor have a stake in those companies’ success. Investors don’t typically build startups. Ideas, in and of themselves are just that, ideas! Without a seasoned management team to execute on the development of the idea, the startup possesses little value. Great management teams which can execute are not generally sitting idle awaiting the next idea.
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Finally, lets assume that your idea really is an original, scalable idea in a market open to significant development. By asking for an NDA, you have just announced that you have not done your research – that you do not have the necessary experience to execute and drive the idea. Essentially, you have announced you are inexperienced and naïve. A savvy, experienced entrepreneur knows that Angel groups/VCs seldom sign NDAs.
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Here are 5 Reasons Angel & VC Funds Avoid NDAs:
NDAs are Costly
NDAs are legal documents which, if done correctly, typically require the review of an attorney. Boilerplate versions generally require effort from attorneys for the party that did not originate the document. Once commenced, most individuals seldom move forward, leaving said boilerplate untouched. Typically, the parties negotiate aspects of the agreement and re-write the original document, requiring even more legal support.
NDAs are Time Consuming
Angel/VC funds review hundreds, sometimes thousands, of opportunities each year. In addition to the grueling work already required, imagine the additional effort it would take to administer and maintain the terms and conditions of thousands of NDAs. Eventually, they would have no time left to review new opportunities.
NDAs Significantly Reduce Deal-Flow
Each time a fund’s manager executes an NDA in a given space, they find themselves with limited personnel. The typical Angel/VC fund office does not a large number of individuals on hand. Additionally, the personnel they DO have are often experts in a particular space or subspace. Limiting their access may remove that VC from all future opportunities in that space, hence, radically reducing deal-flow.
Angels/VCs Simultaneously Review Multiple Similar Opportunities
It is not uncommon for an Angel/VC fund to have multiple entrepreneurs pitching similar ideas at the same time. Requesting execution of NDAs in this situation could create a, “which comes first, the chicken or the egg?” type conundrum. Without an NDA, some entrepreneurs won’t provide the information the investors need to make a choice. However, if the Angel/VC funds DO execute NDAs, they may only be able to look at one of the opportunities – the one for which they execute the NDA. On what basis do the investors decide which opportunity to choose?
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NDAs Enhance the Angel Group/VC Fund’s Susceptibility to Litigation
If they subsequently invest in a company with a similar idea after executing an NDA with another, they may be accused of stealing the idea. Even if they didn’t, and they win the law suit, in the end, they still lose. The litigation is a time sink! Angel and VC Funds are simply unwilling to accept this increased risk of litigation.
The entrepreneur’s best bet is to segregate the “secret sauce” (the technology or information that truly is impactful and secret).
Sophisticated people manage Angel and VC funds. If they have a high interest in the opportunity, have completed their due diligence, and are ready to invest pending the opportunity to review said “secret sauce,” a narrow NDA can be crafted to protect the startup. Sometimes it is helpful to involve an outside expert who can validate the “secret sauce” without constraining the fund.
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NOTE: This article may discuss issues for which legal advice should be considered prior to a decision or agreement with a third party. It should be noted that the author is not an attorney, and FundingSage is not a law firm. FundingSage’s employees and affiliates do not provide legal advice. We recommend you seek the services of an attorney if legal advice is required.