SAI contributor Mark Davis is a venture capitalist at DFJ Gotham. He writes Get Venture, a blog aimed at helping entrepreneurs trying to raise money from VCs. We’ve previously published Mark’s thoughts on the objective of the first meeting and the importance of knowing your competition and not looking like a bozo.
First-time entrepreneurs sometimes ask VCs to sign NDAs (Non-Disclosure Agreements). They do this because they are worried that the VCs will steal their ideas. What they don’t realise is that this makes them look naive.
Most VCs don’t sign NDAs. Why? First because it’s a waste of time and money. VCs typically review thousands of business plans a year – if they had to pay lawyers to evaluate thousands of NDAs they wouldn’t get much else done.
Also, there are frequently several startups trying to solve the same problem. VCs may meet with many of them before they figure out which company they want to back. If they had to sign NDAs with each company before hearing the pitch, there would inevitably be companies taking action against them when they backed another.
However, VCs refusal to sign NDAs doesn’t mean that the entrepreneur is entirely unprotected…
While there are exceptions, most VCs follow an informal code of ethics when it comes to intellectual property. They do this for a few reasons. First, it’s the right thing to do. Second, a failure to do so would create professional risk: no one would bring them any more opportunities.
It’s generally not a good idea to ask a VC to sign an NDA, because it will make you look naive. If you are not comfortable with discussing your business without a legal document in place, then it may make sense for you to look for angel investors that will sign an NDA. In my opinion, the best way to protect yourself is to make sure that you are pitching VCs that are not on the board of a competitive company. Beyond that, VCs are generally ethical professionals and are, in my opinion, safe to speak with.