5 reasons BAs may not sign an Non-disclosure agreements (NDAs)

Why should a Business Angel sign an NDA? Is it more risky for the investor or the entrepreneur? Here are some good reasons to refuse to sign an NDA…

Why do Business Angels often decline an opportunity when a NDA is requested? Here are just a few considerations from my point of view:

  • It’s obvious. In 95% of cases, the concept or idea being protected is obvious and already being done by someone else. In these cases, I suspect that the reason the NDA is required is that it’s uninvestable because there zero barrier to entry or put another way “prime mover advantage is key to the success of the project”. The height of the barrier to entry will be a key consideration in obtaining funding.
  • They will steel my idea. Many people I speak to assume that the investor will run away with the idea. As Thomas Edison says “Genius is 1% inspiration and 99% perspiration.” That is, what really matters is the ability to execute the idea. An entrepreneur with market expertise, time, energy, enthusiasm, etc. should be well ahead of a busy, generalist looking to invest funds over a number of ventures.
  • The NDA is too broad. The information protected is usually very time-sensitive and low on detail. That is, the strategy and financial part of a business plan are likely to be out of date within a month of it being written. The “all information NDA” is too broad and can prevent due diligence from being carried out effectively by either side. In addition an NDA can “gag” an investor and prevent them spreading the word and obtaining new customers. However a specific NDA for a pre-patent design, commercially confidential supplier or customer agreement makes sense.
  • Submarine NDAs. While I’ve not experienced one, this is where an inventor seeks to get NDAs signed by as many people as possible. They wait a year and then, when someone does something similar, attempt to sue all those who received the NDA. While the case may not succeed in court, there will be management time and lawyers fees to pay for while assessing the risk and strategy to move forward. To prevent this, the recipient of the NDA will need to do due diligence on the entrepreneur before knowing anything of the prospect.
  • Onerous compliance procedures. Once the NDA is in place there is an obligation on both parties to document what was revealed, which parts are confidential and confirm that the information is not already in the public domain. This could become excessive especially when the terms of the NDA are too broad. Practically, what’s the point of attempting to put legal cover in place if neither party has the ability nor appetite to (a) appear in court to enforce it; and (b) attached a financial loss calculation to it?

So if you ask for someone to sign your NDA, don’t be surprised that it is politely refused. Instead look at providing information that you feel does not require and NDA in order to get your first investors on board and interested.

This Post Has 5 Comments

  1. The issue of NDA’s comes up time and time again. The trouble is there are too many books, websites and blogs out there advising people to get and NDA without really understanding the implications.

    I’d also argue that very few business ideas are genuinely new and those that are new, valuable and investable are probably related to the execution rather than the business idea itself.

  2. The sad fact is that in my experience both investors and people with ideas have a real lack of understanding about the role/value of NDAs.

    It’s obvious. Completely wrong and a typical attitude of investors who don’t like the hassle of NDAs. If you believe it is true sign the NDA either you are not bound by it or you will protect the possible viability of your 5%. No NDA no opportunity. NDAs are time limited.

    They will steel my idea. Many investors have an over inflated view of the value they bring to the table. Without the 1% the other 99% is worthless. Signing the NDA is part of the cost of getting at the 1% and making sure that the 99% is not wasted. Ideas are stolen; sad but this is not rare. Also investors like to “blab” to other investors, which is a bigger problem.

    The NDA is too broad. True often the issue. Early stage discussions should not be under NDA and should not disclose anything of “significant” confidential nature. Financials are nearly always worthless. Market information, strategy and technical information are often of value and should be disclosed under NDA. Due diligence is a staged process for the benefit of both parties. Gagging investors is a good idea as they should only spread the word if asked or instructed to do so.

    Submarine NDAs. You have not experienced this because it is a myth. Only a lunatic would try and make money this way and you can usually spot those.

    Onerous compliance procedures. Most NDAs are time limited. You just need to keep a record of what you were told or you provided and keep your mouth shut for a period of time. Apart from some serious legal benefits for both parties the NDA and willingness to comply is a marker of trust to people with ideas. Saying it is too much bother immediately tells me that an investor does not take the other party seriously. That is very often true.

  3. Many thanks for your comments Nick.

    I feel that there is a subtext that Business Angels do not always bring or do everything they claim that they can do for an investee company. I think one of the issues is that there is little or no qualification of Business Angels by entrepreneurs or companies looking for money. Often a company will not even ask for a Business Angel’s CV. On the other side, many want-to-be Business Angels don’t understand what they are letting themselves into. They do not understand that a company with a turnover of £1000 is different to one where they were running a division with £100,000,000 turnover!

    I would suggest that if an entrepreneur checks the investor as well as the investor checks the entrepreneur, the need for a NDA may well never become a requirement.

    In general I would say that there is a definite lack of experienced Business Angels in the UK. Indeed I would suggest that some of the investment industry needs their investors to be inexperienced in order to operate effectively. We have a deal-driven industry rather than an exit-driven industry.

    But if you want to be a good, effective BA, finding information on how to do things is remarkably hard… hence this website to attempt to fill the gap.

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