Much has been written in the past by VC’s and entrepreneurs about Confidentiality Agreements or Non-disclosure Agreements and when or if they are appropriate for pitching/negotiating for investment into a Start-up business. Here is my take on the matter…and Yuuwa’s position (I have linked below to a couple of my favourite posts on the topic).
I was prompted to write this post after we received an email from an “inventor” last week to the effect that we couldn’t expect him “spill the beans” to us having not received a signed Confidentiality Agreement.
First up, I don’t steal ideas. Ideas alone will never make money, people who implement big-ideas are the ones who make money… this leads to my next point,
Secondly, I am way way too busy to implement an idea presented by someone else to me… as a VC we invest in the people who can realise ideas, not in the idea “per-se”.
So “what about other people you know stealing my idea and implementing it?” I hear you say… well…
Thirdly, I will disclose within a matter of minutes any conflict I may have with existing discussions/investments or contacts. Following this disclosure the investor is welcome to proceed or not.
- Unfortunately this approach is not taken by all VC’s, just a few months ago I sat through a very good pitch from a student inventor who had prepared an excellent market analysis for a new sports related performance measurement device. Only after his pitch and when he had left the room did another VC sitting in the same meeting mention that his fund was backing a directly competing sports performance device, he knew what was being pitched and he knew he would be in a conflict situation. As a minimum he could have disclosed it prior to the pitch so the inventor could determine whether or not to continue.
Lastly, if you cannot pitch your Start-up in a first meeting without a Confidentiality Agreement then you should probably do some more work on the concept/presentation.
Any presentation I view is treated as “commercial in confidence”, I do not disclose details of the presentation to others without the express permission of the presenting party.
“How about my legal protection?“…
I have been working on fund raising/Mergers and Acquisitions for nearly 20 years now. I have been directly burned by selective breaches of confidentiality by parties with whom I have had a Confidentiality Agreement – via press articles that contain much more details than any journalist could know unless briefed by one or two people sitting opposite me in a negotiation. Despite all of this experience and a very large number of deals/negotiations and pitches I have NEVER seen anyone take legal action on the basis of a Confidentiality Agreement.
So … “when do Confidentiality Agreements make sense?”:
If we (as Yuuwa):
a) get into diligence on a company,
b) have either signed or are on the verge of signing a Term Sheet and
c) are digging so deep into the business that what we see is very detailed and potentially transferable, or
d) if we have requested some third party review…
then we would consider signing an industry standard Confidentiality Agreement / NDA such as that provided by AVCAL :
Some posts on Confidentiality Agreements and NDAs which I found useful:
To quote from Guy: “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.”
Brad Feld: http://www.feld.com/wp/archives/2006/02/why-most-vcs-dont-sign-ndas.html
VentureHacks on pitching and NDAs: http://venturehacks.com/articles/plans-ndas-traction Refer section on NDAs.