“As a potential investor, I won’t sign an NDA until I know that the business meets my investment parameters. I may sign one if I need specific detailed information for my own due diligence. Of the hundreds of companies that I review, advise, or invest in, I’ve only signed about a dozen NDA’s in the last year.” – Ken Forster, Managing Director of ThingMUSE
A non-disclosure agreement (NDA) imposes obligations that prevent one or both parties involved from disclosing certain information, and these agreements are as varied, and cover as much ground, as the companies that implement them. The protection of intellectual property, trade secrets, and other sensitive company information often warrants the need for an NDA; however, there are certain times where bringing an NDA into the equation can prove to be a hindrance, especially when it comes to fundraising.
We spoke with several EquityNet investors and asked them their thoughts on NDA’s, when they’re comfortable signing them, and when they feel it’s appropriate to bring them into a discussion. In our conversations, a common theme emerged: signing an NDA is not a trifling matter, and entering into one is typically not the first thing a potential investor wants to do.
“I want to have the freedom and the comfort to be able to review anything that comes across my desk that I have an interest in. If I’m signing an NDA, then that certainly limits my capability. A simple statement, comment or suggestion could be construed as a violation, and I don’t need (or want) to spend money on attorneys by entering into such an agreement.” – Alan Leszinske, Investor and CEO of TecMed, Inc.
With over 30 years of experience in research, technology development, and startups, as well as over four patents granted, Mr. Leszinske has financed 14 companies, and is no stranger to the world of NDA’s. He shares a common view held by many private investors; signing an NDA in early stage conversations will almost surely deter any interest away from a company.
“There are times when NDA’s are absolutely critical for both parties, and times when they’re absolutely a hindrance,” says Leszinske. “Why should I limit my ability to look, talk, and engage with other people who may or may not have similar technologies, concepts, or ideas that are packaged a little differently?”
Active investors often review dozens of companies per week, and since these reviews are preliminary and fairly casual in nature, the majority of investors don’t want to have their ability to seek out investments trampled upon by entering into a legal agreement with a single entrepreneur. Investors simply want enough information about a company to pique their interests in the initial stages of communication.
Typically, if entrepreneurs cannot explain what their businesses do or how they operate by using public information, they may want to consider how they approach potential investors. “You should be able to pitch your company and explain your business plan without having an investor sign an NDA,” says Monica Minkel, Managing member of Stuffed Sheep Properties, LLC. “Frankly, you should have a version of your plan you can present to investors that doesn’t need an NDA,” she continued.
So, why do some entrepreneurs want potential investors to agree to NDA’s early into the conversation? Many investors believe that it’s a symptom of inexperience. Countless entrepreneurs are so eager to obtain capital that they will not hesitate to divulge any and all information about their companies. Other entrepreneurs simply don’t realize their ideas are not original, or what they want to convey to a potential investor does not necessitate the need for such a legal instrument.
“I would view a company with great skepticism if I went to the trouble to sign an NDA, but was given access to information that did not warrant such a thing,” says Minkel. “However, an entrepreneur who is savvy enough to secure legal representation and develop a non-disclosure agreement is far more likely to get my investment dollars because it shows a level of business acumen that many start-ups don’t have.”
In the end, entrepreneurs need to realize that they have multiple options when it comes to what they want to divulge to a potential investor. EquityNet offers entrepreneurs the ability to provide accredited investors with as much information as they see fit, but they also need to see things from those investors’ point of view. Real, accredited investors want to see ideas in motion. They want to see that an entrepreneur can focus her ideas into action, and can generate tangible results based on those ideas. An idea without execution is worthless, but the person who is willing to work on her idea could change the world.