Updated 05 June 19
A non-disclosure agreement (NDA) is one of the most common tools used in business to protect intellectual property and confidential information. ‘Will you sign my NDA before we speak?’ is a very frequent question first time founders have, and something that we hear a lot from those wanting to join our programme.
As popular myth has it that everyone operating in financial industries are evil overlords, perhaps it’s conceivable that founders believe they’ll run away with an idea and sell it for billions. However the reality is actually quite different. We don’t sign NDA’s, and neither do any other startup investors or funding partners, let me put some context behind this and explain why.
1. It would stop us from speaking to anyone else
Last year we received over 1600 applications to our startup programme. We review, provide advice and feedback to all of these. The startups and founders that apply cover all different tech verticals and industries.
Not considering the implausible resources involved in reviewing, signing and keeping track of NDA’s for each of these, if we were to sign them we’d be legally encumbered and not allowed to discuss or compete with other founders in each of their certain products or service areas. If it turns out that we’d already been working on a business idea in a similar space or been talking to a friend who was working on a similar business idea, we would be legally obligated to stop working on that business idea and bound to stop discussing that business idea with anyone else that was working on it. Why would we agree to limit our legal rights in exchange for nothing in return? We wouldn’t. Nobody would.
2. We’re not particularly interested in the idea
“Ideas are commodity. Execution of them is not.” Michael Dell, Founder - Dell.
The truth is that at the early startup stage that we operate, in 99% of cases, the ‘idea’ that you’re trying to protect is worthless. The value that ourselves and our investment partners are looking for lies within the problem area that you’re tackling and the size of it, yourself, the team and their experience, the competitive landscape and evidence gathered to date. Essentially your ability to execute on the idea, rather than the idea.
We’ve developed and launched over 70 startups now, and understand that change is part of the process of building a successful startup. Not one of our startups have reached market success with the initial idea that they came to us with, all have either significantly iterated, pivoted or changed path multiple times. Our favourite startup guru Ash Maurya says “startups that succeed are those that manage to iterate enough times before running out of resource”.
Furthermore the likelihood is that you're not the first person to think of your idea anyway, case in point how many social networks existed before Facebook came along? Mark Zuckerberg and friends simply out-executed everyone else.
3. You don’t need to share the ‘secret sauce’ detail
In all of our discussions with founders, once we’ve explained the reasons why we’re not going to sign an NDA, once understood and we open discussion it always turns out that there was never the need to talk about anything confidential. 99% of the startup ideas that we encounter have no actual secret content, and the rest can be discussed meaningfully without revealing any IP that is particularly sensitive.
In our post how to nail the perfect startup pitch we explain what information ourselves and investors want to see, none of it refers to explaining in detail the technical intricacies of how your product is built. Problem, competition, market size, team and feedback to date are all way more important to cover in your opening discussions.
Our advice is always to prepare as if everything in your pitch deck is going to be shared, it won’t be, but it gives a good steer as to what does and doesn’t need to be in there. For added assurance we always reference Eric Reis advice from The Lean Startup on the topic of idea theft.
“Find the name of the relevant product manager at an established company in your startups industry, and try to get that company to steal your idea. Call them up, write them a memo, send them a press release - go ahead, try it. The truth is that most managers in most companies are already overwhelmed with good ideas. Their challenge lies in prioritisation and execution, and it is those challenges that give a startup hope of surviving.”
4. It show’s naivety on the entrepreneurs side
Every time we receive a request to sign an NDA, it draws eye rolls amongst the team and it’s the same amongst most working in the startup ecosystem. It’s a red-flag for us as it instantly tells us the following things about a founder:
- They’re inexperienced and they probably haven’t built a successful business before
- They’ve taken and acted on bad advice on this front
- They don’t want anyone to know about their idea, when they should be telling everyone about it
- They’re overvaluing their idea, and undervaluing the importance of execution
- They’re cutting off valuable feedback, founders need as much customer and potential customer feedback as possible - an NDA is a blocker to this
- They are likely to be a tricky and untrusting founder to work with
Our experience has proved that those overly focused on protecting an idea do not make the best founders. Our own and investors time is crucial, if we have the choice to speak to someone openly without an NDA and someone who is going to require weeks of negotiation and a lawyer before a discussion can happen, you can guess who is going to get our attention.
5. You wouldn’t be able to use it anyway
Ok so looking at the ‘best case scenario’ for founders requesting NDA’s, let’s say you do manage to convince someone to sign it, then you’ve invested time monitoring all of their subsequent activity and spotted what you believe is an infringement. You would still need to go through the process of defending it against the investors. Put simply, It’s stupidly expensive and you’ll likely lose. By the end of this, you’ve spent real money and time that could have been invested in the company.
Antone Jonson, former in-house counsel for MySpace and eHarmony, and a lawyer who works with startups and tech entrepreneurs explains “In 15+ years of representing companies ranging from pre-funding startups to NYSE-listed, multi-billion-dollar behemoths, as well as their founders, investors, Board members and executives, I've never once seen them involved in litigation over an NDA. On either side.”
Founders and their lawyers can waste countless hours negotiating NDAs. In the early stages of your startups life this is crucial time that should be spent speaking to as many people as possible about your startup idea. So there's no point in agonising over a document that, in the vast majority of cases, will never get used.
I hope this has provided some context to our, and the industry’s, stance on NDA’s. I’ll caveat this by saying that If you are in a later stage, or scale up, you may have reason to consider one or a different version of IP protection (patents, trademarks etc), but not until then.
You should think carefully about the fact that if your business is so fragile that it could be ruined by someone overhearing a discussion or viewing some slides about it, then it’s probably not a strong enough, defensible, business model and opportunity for any investor.
I can say with some confidence, that taking heed of the points above will improve your chances of getting invested. Please take our advice and drop the NDA requests.