Are NDAs Important Anymore?

Thursday 17th February 2022 Dave Sharp Start Ups!

Are NDAs Important Anymore?

An NDA or non-disclosure agreement is a legally binding contract that creates a confidential relationship between two or more parties. The party or parties signing the agreement agree that all sensitive information they may learn will not be made public to any other party. An NDA can be referred to as a confidentiality agreement.

NDAs are common for businesses entering into negotiations with other businesses, or with investors they hope will fund the company.. The parties involved can share sensitive information without fear that it will end up in the hands of competitors. The 3rd parties involved can also share information with the company - and this 2-way protection means the NDA can be called a mutual non-disclosure agreement.

Are NDAs still in common use?
There is plenty of commentary online that will state that NDAs are out of date as a concept and therefore irrelavent. There is a common train of thought that NDAs are hard to enforce and legally difficult to persue in court.
An NDA in reality is an expected part of the transactional process of dealing with other companies and investors. It might be an older notion of a pre-digital era, but there is still a common courtesy aspect of business that will take place over the offer and acceptance of an NDA document.

Why do investors commonly refuse to sign them?
Most investors (not all) will expect you to ask for an NDA to be put in place, so they can say no. There are no malicious reasons or intent here, just a set of circumstances under which they are operating that the concept of an NDA does not work as intended.
Investors are commonly assessing multiple opportunties of a similiar nature at the same time. An investor meeting with recruitment startups may well be meeting with several in an attempt to make the best decision for them and their funds. If an NDA is in place with one startup, it will hinder their ability to meet with other similiar companies, and therefore limit their investment options.
Startups often feel nervous about this, feeling that an investor could be shark-like and steal an idea or concept and execute it without them. Most investors understand this and some will offer personal assurances. Maintaining a good reputation is important for the investor and they dont want to get caught up in situations that come with negative press - meaning they are less inclinded to take ideas and transpose them.

Is there an exception?
The exception is where there patents in place or pending. The requirements for a patent mean that NDA documents may need to be in place with everyone and investors will understand why this might mean that they will need to sign one.

Should you even ask at all?
Industry expert Guy Kawasaki said this:
“Before you even start addressing the hard stuff, never ask a venture capitalist to sign a non-disclosure agreement (NDA). They never do. This is because at any given moment, they are looking at three or four similar deals. They’re not about to create legal issues because they sign a NDA and then fund another, similar company–thereby making the paranoid entrepreneur believe the venture capitalist stole his idea. If you even ask them to sign one, you might as well tattoo “I’m clueless!” on your forehead.”

The established wisdom is that if you have something secret and dont want a VC to know, just dont tell them - rather than ask them to sign an NDA so you can tell them. It's not arrogance that stops VCs from signing NDAs, just the practicalities of how their world works and keeping a lid on the amount of legal documents they have in play.

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