You’re a tech entrepreneur at an emerging startup. To date, you’ve bootstrapped your company, but now you’re at the stage where you’re preparing to take on outside capital. You’ve just had your first meeting with a VC and it went well enough that the potential investor asks you for background documents, including financial projections, product information and an investor deck. Before you hand over the information, your co-founder demands that the VC sign an NDA. What should you do?
Here are four things you need to know about VCs and NDAs.
1. NDAs are designed to protect your sensitive information
An NDA, or non-disclosure agreement, is a legal agreement where one party — in this case, a potential investor — contractually agrees not to share certain information with any other parties. The scope of the NDA can vary depending on the exact wording. The party that initiates the NDA — in this case, the entrepreneur — generally has intellectual property or other proprietary information they want to protect in order to maintain a market advantage.
2. VCs won’t sign your non-disclosure agreement
VCs refuse to sign NDAs because it creates unnecessary legal work and expenses — lawyers bill by the hour, and parsing a detailed NDA can be time-intensive!
More importantly though, NDAs prevent VCs from talking to similar companies and mapping — whether formally or informally — the startup ecosystem in a particular area or industry. It’s the VC’s job to talk to all the companies in the ecosystem and then back the ones which best fit their investment thesis.
3. You shouldn’t worry about it
VCs are in the business of making money by backing companies, not starting them. It’s unlikely that they’d want to steal your intellectual property.
VCs also rely on reputation, and the startup ecosystem is close-knit: everybody knows everybody, and we all attend the same meetups and tech conferences. If a particular VC gets a reputation for violating a company’s privacy and confidentiality, then entrepreneurs stop going to them. There is even a website dedicated to reviewing and rating VCs.
But it’s important to remember that you want VCs to be talking to other VCs and early-stage investors about your company. They may bring in co-investors or, if they decide to pass, they might send your information to another VC.
In short, don’t bother asking a VC to sign an NDA because they will probably say no. Here’s a selection of other blog posts on this topic by Guy Kawasaki, Brad Feld, and Mark Suster. Entrepreneurs should only realistically expect NDAs in later-stage growth equity deals or in acquisition scenarios, where diligence is more extensive and the information is more sensitive.
4. Lenders probably won’t sign one either
Lighter Capital does not sign NDAs, for many of the same reasons VCs don’t sign them. However, our diligence is comparatively limited and less onerous. As a revenue-based lender, we’re less interested in reviewing a company’s technology, patents, or competitive landscape, and more interested in understanding the company’s financials, revenue model, and customer relationships. This information validates the product and technology for us.
Our online application process is very secure, unlike the standard VC diligence process with hundreds of individual emails and attachments exchanged between you and the VC partner. Lighter Capital uses HTTPS encryption technology with an A rating in encryption protocol standards and a strong multi-factor authentication system. These security measures ensure that all the information we collect and use as part of our process is safeguarded internally, and never shared externally. Additionally, all employees at Lighter Capital sign confidentiality agreements that prohibit us from sharing information externally.
Learn more about Lighter Capital’s strict privacy and security policies and why we’re a financing partner trusted by more than 350 tech entrepreneurs.