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Investors Do Not Sign Non-Disclosure Agreements
Issues of disclosure of proprietary information to potential investors are problematic
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Entrepreneurs are often surprised when investors refuse to sign non-disclosure agreements (NDAs) or confidentiality agreements when offered an opportunity to read the entrepreneurs’ new business plans. After all, every new startup features secret ideas, partnerships, intellectual property and/or technology.
Why won’t investors sign NDAs? Investors are pitched for funding by as many as 5,000 startup companies per year. Most NDAs have a 2-5 year term, so by signing NDAs, an active investor would be attempting to operate under the yoke of as many as 10,000 NDAs at any point in time. Just tracking them would be a nightmare. So, long ago, investors simply said “no.” If you want to pitch to them, understand that they will not be signing a NDA.
What is an entrepreneur to do? Here are a few suggestions:
1. Do a bit of due diligence on all potential investors to gauge their integrity. If investors are active in your community, it is quite unlikely they will have interest in stealing technology. One whiff of that around town and their future opportunity for investments will be toast.
2. Learn to write all forms of your business plan without your “secret sauce.” Investors don’t need to know the chemistry in your patent to size up the investment opportunity. Tell investors how your unique formula will delight customers! And, they don’t need to know the name of the big company who is evaluating your product under a confidentiality agreement. Just tell them a large public company is doing so.
3. Talk to your advisors about what really is proprietary information. Customer (or potential customer) lists are surely not confidential. Business models are rarely proprietary. Be realistic about what is and is not confidential to your company and find a way around disclosing truly confidential information in your business plans. Remember: The purpose of all business plans is to attract investors. None will invest until they have, in fact, completed exhaustive due diligence after reading your plan.
4. If, during due diligence, the investor asks for more information which you consider proprietary, you can ask their willingness to sign a narrow NDA covering only that aspect of your business. Many will do so, but some will not. You will then need to decide if you trust those who will not enough to share your truly proprietary information.
Issues of disclosure of proprietary information to potential investors are problematic for entrepreneurs. It is important for entrepreneurs to understand the realities of the marketplace (investors will not sign general NDAs) and work with advisors to write cogent business plans that entice investors to take a close look at the company. Full disclosure issues, if any, can usually be resolved just before closing the deal.
Why won’t investors sign NDAs? Investors are pitched for funding by as many as 5,000 startup companies per year. Most NDAs have a 2-5 year term, so by signing NDAs, an active investor would be attempting to operate under the yoke of as many as 10,000 NDAs at any point in time. Just tracking them would be a nightmare. So, long ago, investors simply said “no.” If you want to pitch to them, understand that they will not be signing a NDA.
What is an entrepreneur to do? Here are a few suggestions:
2. Learn to write all forms of your business plan without your “secret sauce.” Investors don’t need to know the chemistry in your patent to size up the investment opportunity. Tell investors how your unique formula will delight customers! And, they don’t need to know the name of the big company who is evaluating your product under a confidentiality agreement. Just tell them a large public company is doing so.
3. Talk to your advisors about what really is proprietary information. Customer (or potential customer) lists are surely not confidential. Business models are rarely proprietary. Be realistic about what is and is not confidential to your company and find a way around disclosing truly confidential information in your business plans. Remember: The purpose of all business plans is to attract investors. None will invest until they have, in fact, completed exhaustive due diligence after reading your plan.
4. If, during due diligence, the investor asks for more information which you consider proprietary, you can ask their willingness to sign a narrow NDA covering only that aspect of your business. Many will do so, but some will not. You will then need to decide if you trust those who will not enough to share your truly proprietary information.
Issues of disclosure of proprietary information to potential investors are problematic for entrepreneurs. It is important for entrepreneurs to understand the realities of the marketplace (investors will not sign general NDAs) and work with advisors to write cogent business plans that entice investors to take a close look at the company. Full disclosure issues, if any, can usually be resolved just before closing the deal.
Hi HotFishMT- I agree with your implication that there are good investors and bad investors, just like there are good entrepreneurs, bad entrepreneurs and scam artists looking for their next pyramid scheme. That is why I urged entrepreneurs to do “due diligence” on their investors.
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