A startup, like any new business, is inherently risky, and you’ll want the venture to be as financially and legally secure as possible. But more than that, it’s kind of your baby. It’s something that you have created, and obviously you don’t want someone taking that away from you.
So it seems to make sense to want to make every potential investor you show your work to sign a non-disclosure agreement (NDA). It’s meant to keep an investor from having the ability to pass off your hard work to someone else and cut your competitive advantage.
It is very likely however, that a potential investor will refuse to sign an NDA before you’ve even gotten halfway through sliding it across the desk towards them. In some circles, it’s actually considered a faux pas.
It’s usually not worth it at this point in the relationship
A non-disclosure agreement is meant to keep the potential investor from spreading the confidential information (here, your idea) they have received from you. It is essentially a promise to keep a secret, and if the investor doesn’t keep it, you have an enforceable legal action available to you. The reality is however, that it is only effective if you can afford to go to court to enforce it.
Consider the following points:
Though an NDA is meant to build trust on the side of the startup, the vibe an investor will get is, “If you do X, I can sue you.” That sort of attitude will not get you any traction in the tight-knit world of investors.
You may not have a lot of cash to successfully pursue a claim based on your NDA—after all, you’re a startup that’s strapped for cash. Isn’t that why you’re looking for investors in the first place? And what other investor wants their money spent on this litigation? Having outstanding litigation may just deter other investors from investing in your company.
The life cycle of a startup is potentially like a shooting star, burning bright and ending quickly, so time is of the essence. The courts are notoriously slow—you can’t wait to enforce it anyway.
Instead, strike a balance
You don’t want to come on too strong on the first date, so don’t bring an NDA to your first meeting with a potential investor. That’s a bit too much commitment, and you might not have anticipated all the things that go with it.
So here’s a suggestion: strike a balance by changing the way you pitch your idea to investors. If you aren’t comfortable with what you’re sharing, perhaps you’re oversharing. It would be a good idea to consult an intellectual property or patent lawyer to see if you’re at risk of overexposure.
A good first pitch is one that gives the investor just a taste. Hook them in with the big idea in all its novelty, and support it with an outline of your business plan, what specific market need it addresses, and an assurance that with how you’re approaching the idea, it would be hard for anyone else to duplicate. Don’t rely upon the technical details of how the idea works, focus on what it does and can do. Save the rest for when that investor is seriously interested— and bring your NDA to that meeting.
To see a standard non-disclosure agreement and other documents you may want when securing an investment, visit our Small Business Law Library!
This blog was co-authored by Alina Butt.
– – –
This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos. Find Clausehound.com where you see this logo.