FAQS
Should you require a signed NDA from a potential VC investor?
- Financing
- Preferred Stock
While requiring a signed non-disclosure agreement (NDA) from a VC seems like a prudent step to protect your company’s sensitive information, it is actually not common practice in the venture capital industry. Most VCs are unwilling to sign NDAs for the following legal and administrative reasons:
- VCs are in the business of sharing decision-making information with their portfolio companies (often in a board member capacity with accompanying fiduciary duties). An NDA could place these VCs “between a rock and a hard place” with conflicting duties to disclose and not to disclose confidential information.
- VCs review hundreds of business plans and pitch decks per year. Signing an NDA may greatly reduce a VC’s ability to invest in other companies operating in similar sectors to yours.
- VCs often invest in cutting-edge technology development where speed is critical. In these situations, the VC and the company cannot afford to lose time carefully assessing the risks and rewards of a particular NDA.
- VC firms are sometimes viewed as having “deep pockets,” making them attractive targets for NDA-based litigation. Even frivolous claims can be highly disruptive for a firm’s investment professionals.
- A VC’s reputation is crucial to their success, and breaching confidentiality would be detrimental to their standing in the business community. Many VCs argue this natural market force makes NDAs unnecessary.
Given these reasons and the fact that some VCs might interpret a request to sign an NDA as a sign of distrust, it’s generally advisable not to ask investors to sign an NDA without first consulting with legal counsel. For limited protection in the absence of an NDA, consider sharing only non-sensitive information during your initial discussions with potential investors, gradually revealing more confidential information as trust is established.
As with every rule, there are exceptions. If your company is built around a highly proprietary technology or process, and sharing details about this technology is crucial for the investor to understand your business, an NDA might be warranted. Similarly, later-stage companies with multiple types of confidential information (such as material contracts, computer code, financial statements, etc.) may find an NDA beneficial. In such circumstances, consult with a legal professional to ascertain whether an NDA is necessary before engaging with a potential investor.
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