Non-Disclosures Can Protect Your Idea, or Destroy It

Here are six considerations of when to sign an agreement with investors or other interested parties.

learn more about Martin Zwilling

By Martin Zwilling

Opinions expressed by Entrepreneur contributors are their own.

Most entrepreneurs I meet are reluctant to disclose anything about their idea to investors before getting a signed confidential disclosure agreement (CDA). Professional investors and advisors, on the other hand, usually refuse to sign these agreements today due to the risk of litigation and administrative workload, and will walk away. How can you make this a win-win opportunity?

First of all, I will admit that there is some risk involved with talking to any potential investors, even with an agreement, just as there is risk in all the elements of your plan, product and market opportunity. Yet I can assure you that people who are paranoid, or want to avoid all risks, won't be happy as entrepreneurs, so it's all about balancing the risk-reward scale.

Related: Your Ideas Have No Value

Thus, based on my experience as an entrepreneur as well as a startup investor, there are indeed situations where a non-disclosure is highly recommended, and others where the potential good far outweighs the risk. Here are the key considerations from my perspective:

1. Dealing with known or trusted investors and advisors

If you are approaching a recognized venture capital group, or even an accredited angel investor, a non-disclosure agreement is counter-productive. These professionals value their integrity, like your therapist or financial advisor, and will not share your business details nor steal your idea.

2. Unsolicited proposals or requests for information

If you receive an email requesting details on your plan from someone you don't know, you should respond with a CDA, as well as begin a more serious cross-check with reliable sources. The same is true for people who may approach you at networking events or industry conferences. Build trust first.

3. Discussions with potential strategic partners

Most often, the best potential partners are already in a business complementary to yours. They could easily be your competitor, or copy your business, so a mutual non-disclosure is required here for protection in both directions. It pays to talk to competitors about the business, but not your business.

Related: Avoid These 6 Mistakes in Safeguarding Proprietary Information

4. Disclosures relative to patents

Entrepreneurs should never disclose the details of a planned or current patent application to any outsiders, even with a CDA in place. Potential investors don't need this data, except perhaps as part of a final due diligence after agreement on terms. Product details in the public domain can never be patented.

5. Sharing trade secrets

Some entrepreneurs avoid the patent process, since patent details become public once a patent is issued. Trade secrets, which may be recipes, formulas or processes, should only be disclosed on a need-to-know basis, even to employees, and then always accompanied by a CDA.

6. Select a reasonable agreement duration

In today's world of rapid innovation and new technologies, any individual or company should be hesitant to sign an agreement that limits their activities for 10 years or more. In most cases, a term of two to five years should be adequate. If required, all agreements can be renewed before they expire.

The content of a non-disclosure agreement should be kept simple and straightforward, with a minimum of legalese. There are many samples available from trusted sources, including this one from Entrepreneur. I would be suspicious of any similar agreement more than two pages long.

Professional investors often challenge early non-disclosure requests for an idea or concept, since it's an implementation that makes a business, rather than an idea. They have probably heard the idea a dozen times already, and are waiting to back the right team on the implementation. The last thing they need is an agreement to constrain their actions.

In fact, if you have a good idea, you need smart investors to spread the word to other good investors, so you really want them to talk about you. Remember that without a CDA, you can still explain how your idea works in marketing terms, without revealing how it is implemented or manufactured. If that doesn't get their attention, it probably won't get any customer attention either, and that's the best feedback you can get at that stage.

Related: How to Keep Your Startup's Secrets Private

Martin Zwilling

Veteran startup mentor, executive, blogger, author, tech professional, and Angel investor.

Martin Zwilling is the founder and CEO of Startup Professionals, a company that provides products and services to startup founders and small business owners. The author of Do You Have What It Takes to Be an Entrepreneur? and Attracting an Angel, he writes a daily blog for entrepreneurs and dispenses advice on the subject of startups.

Related Topics

Editor's Pick

Everyone Wants to Get Close to Their Favorite Artist. Here's the Technology Making It a Reality — But Better.
The Highest-Paid, Highest-Profile People in Every Field Know This Communication Strategy
After Early Rejection From Publishers, This Author Self-Published Her Book and Sold More Than 500,000 Copies. Here's How She Did It.
Having Trouble Speaking Up in Meetings? Try This Strategy.
He Names Brands for Amazon, Meta and Forever 21, and Says This Is the Big Blank Space in the Naming Game
Business News

I Live on a Cruise Ship for Half of the Year. Look Inside My 336-Square-Foot Cabin with Wraparound Balcony.

I live on a cruise ship with my husband, who works on it, for six months out of the year. Life at "home" can be tight. Here's what it's really like living on a cruise ship.

Thought Leaders

The Collapse of Credit Suisse: A Cautionary Tale of Resistance to Hybrid Work

This cautionary tale serves as a reminder for business leaders to adapt to the changing world of work and prioritize their workforce's needs and preferences.

Business Solutions

Learn to Build a ChatGPT Bot for Only $30

If you want to see what AI can do for your business, grab this course bundle today.

Business News

These Are the Most and Least Affordable Places to Retire in The U.S.

The Northeast and West Coast are the least affordable, while areas in the Mountain State region tend to be ideal for retirees on a budget.

Health & Wellness

5 Essential Steps to Expand Your Vision and Start Living Your Dream Life

It's time to break free from your comfort zone and expand your vision. When you refuse to settle for a mediocre life, you can start building a life you love.