As an early-stage technical founder, the idea of an NDA sounds appealing. After all, you’ve invested a lot of time and energy into developing your specific solution. The thought of someone else scooping it up from underneath you is unbearable.
In the world of venture capital, however, there is a right way and wrong way to go about NDAs during the pitching process. In fact, requesting one too early in the process can leave a lasting negative impression on potential investors, ultimately thwarting your ultimate goal: to raise funds and move your company forward.
Before you jump the gun and ask a potential investor to sign a non-disclosure agreement, be sure to take the following three steps.
Step 1: Determine whether the investor is trustworthy
Taking the time to perform due diligence on potential investors can help ensure that you find the right partner for your technical startup. By asking tough questions and seeking out additional information when necessary, you can help safeguard your company’s future success — well before the topic of an NDA even comes up.
But conducting due diligence on potential investors can feel daunting. This challenging but critical task should be a regular part of your pitching process.
While some questions may be easily answered through your own research or experience, others may require additional information from third-party sources. Don’t be afraid to touch base with mutual LinkedIn contacts to discreetly ask other founders to share their experiences. And while it may seem tempting to ask for these references from the investor themselves, you run the risk of tarnishing your relationship with them early on.
Your right to be informed about the investors you choose to work with is equally as important as their right to be informed about your technology and its defensibility. Just make sure you handle this tactfully and without looking like an amateur detective on the hunt for ominous and incriminating evidence.
Step 2: Analyze their portfolio to identify potential competitors
Actual NDA violations aside, there is an inherent risk of overlap when it comes to present and future competitors. The truth of the matter is your ideas are not unique — at least not given a long enough timeline — and it’s normal for many people to have similar ideas. Stealing your idea is not the only way for someone to come to the same conclusion you did.
That said, before asking a potential investor to sign an NDA, it’s worth your time to critically examine their portfolio to identify potential existing competitors. If you find any potential conflict of interest, go back to question one and further your diligence to make sure you feel confident in their ability to manage competing companies. Ask them direct questions, such as:
- What prior experience do you have investing in and managing competing portfolio companies?
- If none, how do they plan to handle the potential dynamic?
- If they do have experience managing competing companies, what has their experience been like, and how do they handle the actual dynamic?
Step 3: Consider whether there is a real risk to your IP
If you’re an early-stage technical cofounder, it’s very likely that you covet your IP. It’s not uncommon for founders like yourself to feel like this aspect of your company is the most precious jewel at this stage.
But, in the words of GP Champ Suthipongchai, “At the end of the day, any technology can be reversed or replicated with enough time and money. Even with IP protecting a technology, a determined and well-funded competitor will eventually figure a way to achieve similar results through different means.”1 So, while you may be inclined to withhold access to your IP, there is a simpler way to determine how much information should be shared and avoid putting your potential investors off with too much red tape; leverage what you learned in steps one and two, and apply it to the likelihood your potential investors and their investments with benefit from access to that knowledge.
No investor has the time (or the desire) to go out and recreate what you’ve spent years researching and developing. The only real risk you run with sharing “too much information” is the chance that they’ll somehow break best practices and share it with a later-stage competitor. Still, based on the information you gleaned in steps one and two, this answer will likely come organically and without a doubt.
The best NDA is not needing one at all
Protecting your company’s intellectual property is undoubtedly an important step in the early stages of your company, but requesting an NDA too early in the pitching process can leave a negative impression on potential investors.2 Even still, a well-timed NDA is still likely to be “late” when both parties are already heavily invested in discussions.
Beyond that, enforcing that NDA becomes an entirely different — and difficult — task. It’s much better to do your due diligence on risk and think about what to disclose than rely on enforcement.
By lessening your focus on worrying about how much you can withhold while you meet with potential investors, open yourself up to the steps you can take to share the right amount of information at the right time with the right investors. Perform due diligence on your potential investors, including analyzing their portfolios and determining whether they are trustworthy. Don’t be afraid to ask direct questions and seek out references from mutual contacts or their existing portfolio companies. Remember that any technology can be reversed or replicated with enough time and money, so it is essential to leverage what you learned in your due diligence and determine how much information should be shared.
By taking these steps, you can help safeguard your company’s future success and find the right partner to move your technical startup forward.
References:
- Suthipongchai, Champ. “Software investors must (re)learn these 3 ideas before getting into deep tech.” TechCrunch+
April 19, 2023, https://techcrunch.com/2023/04/19/software-investors-must-relearn-these-3-ideas-before-getting-into-deep-tech/ - Wang, James. “One Definite Sign of a Bad Startup.” Weighty Thoughts
October 9, 2021, https://open.substack.com/pub/theta/p/one-definite-sign-of-a-bad-startup?utm_campaign=post&utm_medium=web
