Capex Asymmetric Trader

8 Reasons Not to Sign an NDA

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One of the most important things for any Entrepreneur to do is to protect their intellectual property. As such I’ve often heard it being said that entrepreneurs seeking to raise capital should ensure that potential investors sign an NDA.

This is nuts. This seems to me to be akin to asking a girl out on a first date and before picking her up, requesting an STD certificate from her. It assumes an awful lot when you are getting to know each other. Good luck with that.

I never sign NDA’s right of the bat. Sometimes, after a review of the overall business plan and management yes…sometimes.

Here’s why

Reason #1. If I had to do so for every deal I looked at I would also need to keep track of all of these businesses that I can’t talk about, and I could potentially open myself inadvertently to a lawsuit by investing in a business with a similar product or even where another person mentions the exact same idea to me. Now I’m in a situation where it could be argued that since we met and talked it was I who spoke first. Not hard when you’re investing in specific sectors. This brings me to my next reason.

Reason #2. Ideas alone are worthless. There are probably more great ideas out there than there are days in each year to deal with them all. Implementing these ideas and turning them into a profitable venture where I will see a return on my money is a whole different ballgame. It takes determination, management skills, cash flow management skills, marketing skills, foresight and acumen. The idea itself is worthless without these skills and they are far more rare than ideas.

Reason #3. I have actually personally never heard of any investor stealing an entrepreneur’s idea. I’ve heard of co founders or management going separate ways and subsequently competing, but never an investor. Investors look to invest in businesses not to steal ideas. We don’t need to steal ideas. Ideas are like grains of sand on the beach. You might have a great idea about a business but I hate to break your bubble, so does everyone else. I would sooner fund an entrepreneur that can show me great management skills and savvy business intellect in a boring business where the business idea is far from revolutionary, than I will someone with questionable management skills and an awesome idea. I look at hundreds of business ideas and to be perfectly honest most ideas are simply not worth stealing even if that was my express intention.

Reason #4. Unless you have the capital and intestinal fortitude to pursue a lengthy legal battle where the prime winners will be the legal profession which is often the case then an NDA is meaningless anyway. Who are you kidding? It doesn’t make you look professional or smart it actually does the opposite. It’s a variation of the “Big hat no cattle” syndrome I spoke about briefly here.

Reason #5. I get all the obligations and you get none…and you want my money??? If you look closely at most NDA’s you’ll find that they offer potentially enormous legal liabilities for you as an investor with few to none for the founders.

Reason #6. Its bad manners to ask me to sign one without asking to meet with me first to discuss your business.

Reason #7. Why would you not want people talking about your business? What part of marketing don’t you get? (This is probably true of 90% of businesses and the other 10% should probably be pursuing patents not NDA’s)

Reason #8. If you’ve never met me and ask me to sign an NDA you’re telling me on your first encounter that you don’t trust me. Do your due diligence on me. I’m going to do it on you. If I’ve screwed anyone before you’ll find out about it and when you don’t find anything then you’re going to have to decide whether to trust me or not anyway. I’m going to have to trust you with my hard earned capital aren’t I?

I’m open to changing my opinion if anyone can provide me with a valid reason to sign an NDA. What are they?

 

Chris

“Don’t worry about people stealing your ideas. If your ideas are any good, you’ll have to ram them down people’s throats.” – Howard Aiken

Comments

  1. Hi Chris
    Great post, as always.

    I think there is a time and a place for an NDA. Often it’s outside the “classic” entrepreneur – investor relationship you are most familiar with.

    Here’s an example of when I drafted my first NDA as an entrepreneur:
    * We had an agreement with a land owner in Indonesia (almost certainly not enforceable) whose land was high in gold deposits which he couldn’t extract;
    * Land owner didn’t have the mining licenses, the technology or the money. We had the technology and could probably raise the money. However getting the mining rights and then licenses could take 2 years and huge bribes.
    * We discover that a listed Australian company has obtained a sweeping license to exploit mineral reserves of the exact type that Land owner has.
    * In fact this listed company doesn’t need us at all. Quite frankly they could waltz in and start mining tomorrow. So all we really bring to the table is (a) the idea (that this land even exists) and (b) some technical know how which they probably didn’t need.

    Given that we needed them a hell of a lot more than they needed us, there was no conceivable way that we could have even talked to them about it without a non-disclosure, non-compete agreement.

    That’s just one example, I’ve seen a few where you just wouldn’t get out of bed without your NDA.

    cheers
    simon

    • Great point Simon. In this situation an NDA makes a lot of sense however its entirely possible that point #4 would fall into this category too. Importantly also in your example you were not dealing with an investor that was not at the same time a competitor. Since they were essentially a competitor in that particular space the dynamics were clearly very different. If however you would have been asking me for capital to further the venture I don’t see how it would have been in my or your best interests to get me to sign an NDA on that particular deal.

      I think NDA’s are severely overused and often times unnecessary. There are clearly some unusual cases where they are suitable.

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