No Angel Investor or VC Will Sign an NDA

If you are an investor in early stage companies, you see a lot of business plans.  Invariably, the question comes up, “Will you sign an NDA?”.  Usually this question comes from an entrepreneur that is engaging in their first start up experience.

An NDA is a non-disclosure agreement, and enforceable in a court of law.  They are used in some businesses, but they don’t work well in early stage investing.  I don’t know of one early stage investor that signs them.

Why?

After all, this entrepreneur has poured their blood, sweat and tears into this project.  They think the thing they are working on is awesome and will change the world, along with making them a tidy sum of money.  Why, why Mr. Investor won’t you sign my NDA that my attorney (who doesn’t know the VC business) told me you had to sign?

I am empathetic to their plight.  I know what it’s like to put your blood, sweat and tears in a business and have it snatched away from you.

But, investors cannot possibly sign NDAs if they want to be successful investors. First, they’d spend half their waking life in a court room or attorney’s office if they did.  Second, investors at the angel and VC level wade through lots and lots of deals to invest in one.  I was reading a blogpost once and a prominent VC said, “I look through flocks of birds and pick one that looks interesting to invest in.”

An investor might see 10, 20, 30 deals that upload photos.   They all are different in some way, but the investor picks one to invest in.  If they signed an NDA on deal 1, they don’t get to look at deal 2.  If they have any ethics at all, they should only invest in one and then be transparent about it.  In investing, you got to dance with who brung you.  It’s not craps where you can spread your bets in the same market niche.

The metrics on investing are such that an investor needs a lot of bites at the apple to find companies that make them money worth the risk of investing.  Hence, no NDA.  Back in 2006, VC Brad Feld wrote about NDA‘s.

1. Even if I was inclined to sign an NDA, I’d have to go through the process of reading it and deciding if it had any problems (many of them do – they are usually overreaching for the information being disclosed), dealing with my lawyer to change it, and you dealing with (and spending time with your lawyer) to accept or reject my requests.  In some cases, I’d probably spend more time dealing with the NDA then with the entrepreneur and his idea.  How stupid.
2. I’d have to keep track of all the NDA’s I signed.  It’s “yet another legal document” in the pantheon of documents we have to keep track of.  Hmmm – maybe we should consider funding a startup to automate the creation and tracking of NDA’s.  Nah.
3. In 20 years of high tech (as an entrepreneur, angel investor, and VC), I’ve never been involved in a situation where an NDA is enforced except in an M&A context.  It’s simply a waste of paper and time for anything but M&A.

I’d also add there is a reputation cost to the VC.  If you show Mr. VC your idea and I tell other entrepreneurs about it, or even worse, steal it and execute upon it myself-how many deals am I going to see?

One of the pieces of the investment process is the element of trust.  Investors have to be able to trust who they invest in, and vice versa.  If it’s a lawyered existence with protocols it’s not going to work.

Fred Wilson doesn’t sign them either.  In a blogpost in 2011, he took it one step further.  He ran into a problem with “reception desk NDA’s“!  I find those stupid as well. I have walked into offices and had to sign one.  What am I going to do, mimic the layout of the furniture?  Take a screen shot of some code on a computer?

One of the things I have observed is the people that run with paranoia, that remain tight lipped, and never share have intense competition in their business.  People that share, are open, and let everyone know what they are doing find partner, create barriers to entry, and wind up making things easier on themselves in the long run.

As plenty of other people have said, an idea is just an idea.  If you think that you are the only one with that idea, you are probably wrong.  There are billions of people on the planet.  Someone somewhere has to be working on the same thing.

Early stage companies are about execution.  Who can take their idea from brain to seed stage?  Then, who can get it from point A to point B and so on.  Those people win the race while the NDA people are waiting for investors to sign.