Disclaimer: This article is not intended as legal or financial advice. An NDA is a legal document that requires considerable planning and legal advice.
An NDA, short for non-disclosure agreement, is a legal document that aims to protect a startup’s confidential information and intellectual property. It establishes a confidential relationship between the parties involved and sets out the information that must be kept confidential.
Startups need NDAs to safeguard sensitive business information such as trade secrets, business plans, and proprietary technology. These agreements are necessary when dealing with employees, contractors, investors, and potential partners. NDAs help prevent unauthorized disclosure or use of valuable assets, build trust, and provide a legal basis for seeking remedies and damages in case of a breach of confidentiality. They are also crucial for setting a tone of confidentiality and discouraging careless chatter. NDAs are commonly used in various scenarios, such as hiring processes, partnerships, investment pitches, product development, and mergers.
This blog post will explore using NDAs when raising funds for your startup.
Understanding NDAs
‘You have to kiss a lot of frogs to find your prince.” “There are plenty of fish in the sea.”
NDAs are legal contracts that establish a confidential relationship between the parties involved and outline the information that must be kept confidential. For startups, NDAs are fundamental for safeguarding sensitive business information, including trade secrets, business plans, customer data, and proprietary technology.
Founders may request that angel investors sign NDAs to safeguard their innovative ideas and prevent them from being exploited by competitors or disclosed to other potential investors. Founders understandably want to protect what they perceive as their competitive advantage.
Importance for Startups
1. Protection of Intellectual Property: Startups often possess innovative ideas and technologies that give them a competitive edge. NDAs help prevent the unauthorized disclosure or use of these valuable assets.
2. Building Trust: When engaging with potential investors, partners, or employees, NDAs demonstrate your commitment to protecting sensitive information, which can foster trust and confidence in your business.
3. Legal Recourse: In case of a breach of confidentiality, an NDA provides a legal basis for seeking remedies and damages, offering startups recourse against unauthorized disclosures.
Key Considerations for Startups
1. Customization: Tailor NDAs to specific relationships and circumstances. For example, an NDA with an investor may differ from one with a potential business partner.
2. Clear Definitions: Clearly define confidential information to avoid ambiguity and ensure comprehensive protection.
3. Duration: Determine the appropriate duration of the NDA. While some information may require indefinite protection, other details must only be kept confidential for a specific period.
4. Mutual vs. Unilateral NDAs: Consider whether a mutual NDA, where both parties agree to support each other’s confidential information, or a unilateral NDA, where only one party discloses personal information, is more suitable for your needs.
When considering the use of NDAs, there are a few best practices you should consider.
1. Seek Legal Counsel: Consult with legal professionals experienced in startup matters to draft and review NDAs, ensuring they align with your business objectives and comply with relevant laws.
2. Educate Stakeholders: Ensure that all parties understand the implications of the NDA and the importance of adhering to its terms to maintain confidentiality.
3. Regular Review: Review and update NDAs to reflect changes in your business and the evolving nature of the relationships they govern.
While NDAs are an essential tool, some startups fall into the trap of using them too broadly or too often. Not only is this ineffective and a waste of time but sending out unnecessary NDAs can also make you look unprofessional and inexperienced.
When does my startup need an NDA
As a rule, Angels and VCs will not sign NDAs when evaluating pitch decks and other preliminary fundraising materials. They often consider multiple ideas in similar spaces, and negotiating confidentiality isn’t practical or time-efficient. Insisting that an investor sign an NDA when reviewing a pitch will likely result in a “No deal” from that investor.
The reality is that many angel investors are hesitant to sign NDAs for several reasons:
1. Practicality: Angel investors often evaluate numerous investment opportunities, and signing NDAs for each can be impractical and time-consuming. It can create administrative burdens that detract from their primary focus of assessing investments’ viability and potential returns.
2. Risk Aversion: Signing an NDA can expose angel investors to potential legal risks and liabilities, especially if they are already involved in similar industries or have investments in competing startups. They may be concerned about inadvertently breaching confidentiality agreements or facing legal disputes.
3. Relationship Building: Successful angel investing is not just about providing capital; it’s also about building relationships and fostering trust between investors and founders.
Insisting on an NDA from the outset may signal distrust or create a barrier to establishing a mutually beneficial partnership.
4. Information Flow: Angel investors often rely on networking, industry insights, and collaboration with other investors to make informed decisions. Signing an NDA may restrict their ability to discuss the startup with their network or seek advice from trusted advisors, potentially limiting the depth of their due diligence process.
The fundraising process can be a nerve-wracking one. You must feel comfortable sharing enough information to entice an investor. You can stage gate information, so that more sensitive information is shared later in the due diligence process. Once you have passed the initial pitch deck and business plan stage, it’s reasonable to ask investors to sign an NDA. As part of due diligence, you’ll share lots of information you don’t want to go any further, including detail in employment and commercial contracts.
If you, as a founder, feel nervous sending fundraising documents without an NDA, password-protected documents can help keep your materials safe by preventing unauthorized sharing. They also allow you to revoke access if that investor declines to meet.
So, what should founders consider when deciding whether to request NDAs from angel investors?
1. Evaluate the Sensitivity of Information: Not all information needs the same level of protection. Founders should assess which aspects of their business require confidentiality and focus on safeguarding those details rather than seeking blanket protection for all information shared with potential investors.
2. Build Trust Through Relationships: Instead of relying solely on legal agreements, founders can prioritize building trust and rapport with potential investors through open communication, transparency, and demonstrating the strength of their ideas and execution plans.
3. Explore Alternatives: If certain information is highly sensitive, founders can explore alternative ways to protect it, such as using selective disclosure or sharing only non-confidential summaries or overviews during initial discussions with investors.
4. Seek Legal Advice: Consulting with legal experts specializing in startup financing can provide valuable insights into the potential risks and benefits of using NDAs in specific contexts. They can help founders craft agreements that protect their interests and address investors’ concerns.
Who should sign an NDA?
As you might have already guessed from this blog, investors may be hesitant to sign an NDA, and startup founders should be equally hesitant about whom and when they ask for an NDA, as asking an investor to sign one too early on can make you seem inexperienced. As a founder, you may want to ask people who join or work inside (or alongside) your company to sign an NDA.
Employees and other team members may already be covered by a contract that includes confidentiality terms, such as an Employment Agreement, Consultancy Agreement, or Advisor Agreement. Often, these contracts will already contain confidentiality clauses covering the information your team member comes into contact with as part of their role.
The fundraising process can be a nerve-wracking one. If you, as a founder, feel nervous sending fundraising documents without an NDA, password-protected documents can help keep your materials safe by preventing unauthorized sharing. They also allow you to revoke access if that investor declines to meet.
When deciding whether to request NDAs from angel investors, it’s essential to think carefully and strategically about the unique circumstances and priorities of the startup. NDAs can safeguard the startup’s intellectual property and sensitive information.
However, while protecting confidential information is essential, founders should also be aware of the practical realities and dynamics of the investment landscape. Building relationships based on trust, mutual respect, and shared goals is essential. By approaching the nuances of angel investing and NDAs with diligence and foresight, founders can improve their chances of securing the support they need to bring their visions to life.