Prepare for battle by laying down your NDA.
That would be my advice to you as you enter the game to raise capital for
your startup.
Look everywhere and you’ll see a vast sea of first time entrepreneurs dance
with smiles on their face in the courtship game called “we need money to start or grow our business”.
On the other side of the dance floor are the angels and venture capitalists
who watch the dancers. Sometimes in awe and admiration. Sometimes in pain and
bewilderment.
But make no mistake, in this game of courtship is a stumbling block called
the NDA (non-disclosure agreement or confidentiality agreement).
Through my connections with thousands of entrepreneurs world-wide, I
understand one of the biggest roadblocks in the mind of a startup entrepreneur
is the lack of almighty cash. Although I would disagree in many cases this is
actually their biggest roadblock, for those truly
ready to raise capital, I give you an insider’s look into
the reasons you will never get an angel investor or venture capitalist to sign
your NDA.
First, what’s the point of an NDA from the view of an entrepreneur? From my
experience, it’s one of two things — they’re either trying to protect specific
secrets (Intellectual Property) on how they plan to execute their idea; or
secondly; they are trying to protect the ‘idea’ itself.
If you happen to be one of the latter, Paul Jones, entrepreneur, angel
investor and current Chair of the Venture
Best group for Michael Best and Friedrich, shared eye-opening insight with me;
“For entrepreneurs
who think their basic idea is so good they can’t tell anyone — those folks lack
the ego it takes to win the entrepreneurial game. In other words, they don’t
have the moxie to think they can best execute on their idea.”
Of course I have been there myself in the early days as a first timer.
Struck by the ‘greatest idea in the world’ lightning bolt, it’s hard to share
with anyone for fear of having the idea ‘stolen’. And so you look for all those
within earshot to sign your 20 year NDA in blood.
But here’s the thing: when it comes to courting professional investors
(read: angels and venture capitalists) who literally see hundreds, if not
thousands, of you every year, you can forget about it. Stick your NDA back in
your pocket because it won’t get signed. And worse, you’ll look like a fool for
asking.
Wait a minute you say… “but I really do have things
about my business which are secret and I need to protect”.
So what’s a budding entrepreneur to do? If professional investors refuse to
sign your NDA, what’s your next move?
Great questions. Let’s smash them down one at a time:
Investors in general refuse to sign NDAs. What do you do?
Your first move is to simply know they aren’t going to sign — so there is
no point in asking. As referenced above, doing so just makes you look naive —
which is not a person investors want to give their money to.
Scott Petty, Managing Director of Signal Peak Ventures, a VC firm out of Salt Lake City, put it to me like this:
“I think most
entrepreneurs, at least the really good ones, realize that NDAs typically don’t
get signed, so you don’t see them too much these days. I know when I do get an
entrepreneur who wants an NDA, it puts a question mark in the good judgement
category.”
And even when I spoke with serial entrepreneur turned angel investor Shlomo
Kramer, founder and CEO of Silicon Valley-based Imperva, about his willingness to sign an NDA when he looks at deals to invest in,
he flat-out told me this:
“I will not sign
an NDA and prefer passing on the deal.”
So in other words, don’t ask.
But what is the reason why they won’t sign?
Jump on the other side of the table for a moment because it’s important for
you to get some perspective. Sit in the seat occupied by your prospective
professional investor. Think about it for a minute — they’re a business too.
They need to bring in revenue. So how do they make money? Basically, it’s
called ‘deal flow’. They need to see as many deals as they can, try to bet on
the best ones which line up with their own areas of core competence, and hope
and pray a few of the many they invest in actually pay off.
So essentially their bread and butter comes from the ‘deal flow’ part. As
much as you want them to sign an NDA, to do so automatically puts chains around
their ankles and handcuffs on their wrists. Imagine them signing NDAs from
every entrepreneur they encounter? Soon buried by hundreds of NDAs, they’d be
stuffed inside a box so tight with no room to wiggle even their nose.
Petty gave me some further thoughts on this from his perspective;
“After 14 years in
this business I don’t think I’ve ever signed an NDA. I’m not willing to. In
venture (capital) we look at too many businesses that are similar to each other
to get entangled in multiple NDAs.”
In other words, to sign NDAs would kill their business model.
But you have Intellectual Property or secrets you’d rather not share, what
then?
Yes — let’s say you do have some ‘secret sauce’ you can’t or don’t want to
share. This is where your skill as an entrepreneur to build trusting
relationships comes into play.
Kramer told me “entrepreneurs should qualify
and vet who they are talking with instead of relying on NDAs”.
Which makes sense. Look, it’s called ‘relationship and trust’.
Shining light on the trust factor, Petty shared how it all works;
“I realize that
many entrepreneurs have IP and ideas they want to protect. When I decline an
NDA I let entrepreneurs know that I will do my best to carefully handle
whatever information they are willing to share. I try to fully disclose any
conflicts and overlapping investments we’ve made so they can gage what they
feel comfortable sharing. Because we are in the deal flow business, if a few
entrepreneurs feel like info(rmation) they’ve shared with me about their
business has been misused or used to gain some type of competitive advantage,
that’s not good and certainly doesn’t make the next guy comfortable in sharing
his new idea (with me).”
So what to do? Take the advice of Kramer and instead of focusing on how to
get your NDA signed, instead focus on finding professional investors with a
high level of character and build relationships. VCs and angels are rooting for
you. As you can see from Petty’s comments, they need you as much as you need
them, so it’s unlikely you’ll get burned — as long as you choose wisely.
Think: Relationships and trust first.
The bottom line
Read hard between the lines and you’ll see NDAs are nothing more than
poison in your relationship with a potential investor. I’ve watched too many
entrepreneurs hold fast to their belief that because they “truly have the best
idea (or technology) since the invention of time itself”, they should be
treated differently.
Please don’t be one of them. Take the road best
described in my in-depth conversation with Jones previously:
Know what you’re doing. Understand the rules of the investor game. And
build relationships first.
But please, leave your NDA at home.
NOTE: If you don’t
know me, I’m Eric. Husband, father & life-long entrepreneur.
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