Why Investors Don’t Sign NDAs

By Marcus Hedenberg
last updated Monday, September 23, 2015

It’s easy to think of Non-Disclosure Agreements as a staple of entrepreneurship, a prerequisite to any transaction or agreement. Everyone wants to protect their brilliant idea, trade secrets or intellectual property, so it seems like a no-brainer to have witnesses sign NDAs so no one will nab it and run off to become a billionaire.

But NDAs aren’t always needed. In fact, they are a pretty good way to antagonize and scare away potential investors. Generally, investors don’t sign NDAs because of the hassle they introduce by potentially preventing investors from seeking out future investments. The implications sting even more if investors choose not to invest, leaving them bound to a legal contract with a single entrepreneur that tramples upon their ability to engage in future deals.

From an investor’s standpoint, it’s a lot more fruitful to forego backing any project that involves NDAs in favor of the hundreds of startups out there that don’t require one. Doing so gives the investor more freedom and comfort to review anything of interest that comes across the desk, especially considering that a mere statement, comment or suggestion could be construed as violating an NDA. That only leads to more money and time spent on litigation, and investors don’t want that.

Doesn’t this mean, though, that the investor listening to your idea could steal it? Theoretically, yes, but the cold truth is that investors care little for ideas themselves in the grand scheme of things. What they care about is results from someone who can execute and deliver on an idea. Plus, if the mere mention of an idea or concept is enough for it to be stolen, then it probably wasn’t a very airtight idea to begin with.

This doesn’t mean NDAs are never appropriate. In certain cases, an NDA may be critical for both parties, especially if a business meets investment parameters and specific detailed information is needed for due diligence. Sharing such detailed information, however, should never be the default approach to early discussions with investors. A better solution is to share broad details that are just juicy enough to wet investors’ appetites. The important thing is that one not leave a bad first impression by introducing an NDA to investors right out of the gate.

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