On NDAs and Confidentiality

Posted on Jul 26, 2009 | 2 comments


This is part of my ongoing series Pitching a VC – the outline is here.confidential

One of the most nerve-racking things for entrepreneurs is when they need to “open the kimono” and show their strategies, products, plans and financial projections to VCs.  This is especially true since many entrepreneurs know that the world of VC is very tight-knit and most VC’s know each other.

On NDA’s

Occasionally I’ll get somebody who asks me to sign an NDA (non disclosure agreement) and I have to tell them, “VC’s don’t sign NDAs.”  This topic has been so widely covered that I’ll mostly just link to the best articles I’ve read over the past couple of years on the topic and add my own quick words if you don’t want to link through.

- We don’t sign NDAs because it would be too time consuming to read and process them all, because we could never track all of the ones we’ve signed and because we see so many companies of which many are competitive.  If we signed NDAs we’d constantly be in a litany of accusations every time we funded a company.  It is highly likely that when we fund a company we saw some of the competitors.

- You shouldn’t worry about NDAs because they’re mostly unenforceable or unprovable anyways.  Paraphrasing Fred Wilson, “you’re far better off working with somebody of high ethics with no NDA then somebody of low ethics with a signed NDA.”  Confidentiality is our business.  If we had a reputation for sharing proprietary information we wouldn’t get too many entrepreneurs knocking on our doors.

Here are the links to the NDA articles if you’re interested in more reading: Startup Lawyer on NDAs (here), Brad Feld (here), Jason Mendelson (here) and Guy Kawasaki (here in the first paragraph).

On Confidentiality

secretThe broader issue that I see is one of confidentiality more generally.  Rick Segal does a good piece on Confidentiality here)

While most VC’s that I know wouldn’t forward your information on to competing companies it is true that the best VCs will likely be meeting with some of your competitors.

So if you send your deck to many VCs how do you protect your information from getting to your competitors or other VCs who may fund your competitors?

Here are my thoughts:

  • When you write your Powerpoint deck write it with the assumption that people you don’t want to read it will get a hold of it. It probably won’t get in the wrong hands but keep your information high-level enough that you wouldn’t feel compromised if it did.  The detailed information can be delivered verbally and/or in follow up documents once you know that they VC firm you’re talking with is more serious.
  • You shouldn’t be overly sensitive about your information.  It is surprising how many companies feel that their information is proprietary and that they are truly innovating in ways that others aren’t thinking about.  Almost all of the time there are 5-6 firms simultaneously working on similar problems in the same way.  I’m a big believer that often the winner is chosen by who executes best … not some grand strategy.
  • Most VC’s have very high integrity when it comes to the confidentiality of the materials they possess.  It’s the job of a VC to protect confidential information and the reputation of that particular VC wouldn’t be in tact very long if they were known for shopping information on sending out your Powerpoint deck.  I say most – I have seen some decks float around unethically.  That’s why I refer to point one above.
  • Some entrepreneurs are paranoid that a certain VC is bringing them in to gain competitive knowledge for an existing portfolio company or an investment they’re about to make in a competitor.  I’m sure that this does happen but as with the point above, I think it is the exception rather than the norm.  If you’re going to see a VC that has a competitive investment already then it’s worth being circumspect and perhaps pointing out that competitive positioning and asking why they are interested in meeting with you or skip meeting them altogether.  If a VC has a competitive investment it is highly unlikely they’ll invest in you.  On the other hand, if you think you’re doing better than your competition then meeting the VC really shouldn’t worry you.  If nothing else you’ll probably rattle the cage a bit ;-)
  • With regards to a VC that sees all of the competition, I have found that most VCs are very good at not leaking information across companies.  If they’re not seeing multiple players they probably aren’t a great VC … do you really want to work with them?  It’s their job to scout the industry and pick what they believe is the winner.
  • One side note that I know will sound mischievous.  If you really do shine more than the competition then sometimes seeing the VC’s who are looking at funding them can play in your favor.  We were looking seriously at a company and one of my partners was sponsoring us to potentially fund them.  I got a call from one of the competitors who already had 2 terms sheets but wanted to see us anyways.  We agreed to see this second company and we called the first company to let them know.  The second company was so impressive that we decided not to fund the first (the second company was too highly priced so we skipped both).  It is a bit Machiavellian, but it probably does work.

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  • http://www.ppm.net Stacy

    Here is what Paul Azous, my boss says about NDAs:

    If you want us to sign an NDA that means you are afraid of something. If I can take your business plan, ‘steal it’, and make a business out of it, what’s that say about your business?

    Your business plan should be much more than 30 pages of information. Do not bring me a business plan to give investors if you want an NDA, they will eat you alive.

  • marksuster

    Almost all business ideas can be stolen – whether legally or not. The value is in the execution. Thanks for your comments.