It's an exciting time. New company, great prospects, money invested, lawyers signed off the paperwork. Money transferred. What now? Start adding value to the company. It's fun meeting people, promoting the product/service. More customers. More income. Break even. Sell the company, lots of money for everyone. That's the picture Business Angels buy into. But is it the reality? What's the impact if you are not focusing on the exit from day zero?
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 That is, the strategy and financial part of a business plan are likely to be out of date within a month of it being written.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.