Why VCs Don't Sign NDAs and You Shouldn't Worry About It

Nondisclosure agreements are not the magic cloak many entrepreneurs imagine and often are simply counterproductive.

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By John Rampton


Opinions expressed by Entrepreneur contributors are their own.

Many entrepreneurs are incredibly sensitive to sharing their billion dollar idea with anyone. The thought of sending a pitch deck to a venture firm, or even pitching their idea on stage is scary...what if someone steals the idea?!

Venture capitalists obviously have the money to steal any idea, so why would you just hand them the blueprints to a billion dollars?

NDA's seem like a great way to protect your valuable idea but this can actually hurt you in the long run. Requiring an NDA stops entrepreneurs from eliciting feedback about the solution to the problem, which probably will need refinement and criticisms. Instead of focusing on the idea, you should focus on the problem it's trying to solve.

When a VC wants to hear a pitch, and is unwilling to sign an NDA, some entrepreneurs are hesitant to share their idea, even though it could lead to a payout. Here are some reasons why you may want to take a step back from the NDA and encourage a free flow of ideas.

Investors aren't building products themselves.

Any entrepreneur knows building a business takes blood, sweat, tears and the hardest work they've ever encountered. Most investors already did the labor of love, and are not interested in doing it again. The whole point of investments is to make their money work for them, so they can sit back and enjoy the mentoring and curating process. Serial angels and VC's have so many businesses on their plate, they certainly don't have the time nor the passion to build it like the entrepreneur who started the company can.

Investors are interested in the team building the product, and that's what's typically more important than the idea itself. Rather than focusing on the idea by using an NDA, an entrepreneur should be sharing his or her past successes and ability to solve the market problem and seize a market opportunity.

Related: Win an Investor's Money by Acing These 5 Questions

The SEC might have a problem with it.

If a venture firm was going around taking ideas, and creating a factory of inventors and developers to re-work your business into something great, the government might catch on and have a problem with it. The venture community can't just go around like rich robber barons stealing valuable ideas and leaving poor entrepreneurs penniless and homeless.

Other companies may have similarities.

Venture firms look at thousands of pitch decks and companies, and there's a chance an entrepreneur's idea isn't as novel or original as they think. If a VC signs an NDA, litigious types might come after them if they invest in a company with competitive features or services, which is just a headache. Some NDA's might even limit the VC from listening to pitches from companies in the same category.

Unfortunately, there is a subset of people who will sue over just about anything, and when companies get roped into signing an NDA with these types, just breathing wrong can bring on a lawsuit.

Related: A Smarter Approach to Non-Disclosure Agreements

Most NDA's don't hold up in court.

Even with a signed NDA, you have to prove the person you are suing did whatever it is you are accusing them of. You have to prove that there was not other means by which they could have had come across the information. If what you told them is publicly available, it won't hold up in court.

You will have to provide evidence that they did it with full knowledge. Not least, you will need enough money to survive in court against a company that has millions of dollars and can string this out over year. You should also note that many don't hold up in court due to vagueness. This isn't even talking about the fact that there are different rules for NDA's based on different states.

I had to learn some of these rules the hard way when developing my online invoicing company Due. We've been building out software for the past year, set to launch in Summer 2015. I had published in a blog post some key things that we were doing (so stupid). Next thing I knew, my competitor was doing that. Took it to an attorney and he found out after an hour of research that I wouldn't win. Why, I was dumb and had made the information publicly available. Don't make the same mistake.

When an NDA is necessary.

Know who you are talking to, and do a quick Google search to make sure the person you are speaking to is an actual person representing a VC or potential partnership. There have been cases of "spies" using false information and stealing ideas in specific industries, one being the case of Mattel employees printing fake business cards and misrepresenting themselves to pilfer ideas from rival MGA. If the person seems suspicious, insist on an NDA and be a little wary.

If a person is going to do a deep dive on your "recipe" or the code itself, and there is something completely novel, then consider using an NDA as they'll be looking at everything you're doing.

How to protect yourself.

Pitch decks are easily shared. That can work to your advantage, given that investors may share with other partners or people in the investment community who your company might work well with. Rather than using an NDA to stifle the excitement an investor may have, use a deck sharing platform that allows you to see who's been viewing your presentation. If sharing starts to become suspicious, you have the ability to revoke access.

The benefit of using a software to share the deck, such as PandaDoc (which I love), is seeing where the investor was most interested or spent the most time. Knowing he spend a lot of time on the revenue slide may mean he or she doesn't fully understand the model, or really liked it. The entrepreneur has the opportunity to follow-up and make sure everything is crystal clear.

Here's to winning over the top investors!

Related: The 7 Elements Investors Look for in Your Funding Pitch

John Rampton

Entrepreneur Leadership Network VIP

Entrepreneur and Connector

John Rampton is an entrepreneur, investor and startup enthusiast. He is the founder of the calendar productivity tool Calendar.

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