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VCs and Non-Disclosure Agreements

Question: I have heard many times that VCs won’t sign NDAs. When I ask why this is, I’m told that reputable VCs won’t share my ideas with others and/or that my ideas aren’t so special or revolutionary that they would be stolen.

In the real world, VCs talk, they look at many deals, they network, etc. I would think in the real world information gets transferred whether maliciously or not.

I am interested on the true facts about this. Additionally, if a VC already has one company in a space and another company approaches them that is doing something novel and interesting in that same space, what happens?

Our Take: You are correct – VCs don’t sign NDAs. It’s not that we are trying to pull a “fast one” or do anything nefarious, rather in today’s over-litigious world, it is a necessary protection. The hypothetical VCs worry about is the case where 2 years ago Brad meets an entrepreneur, he signs a NDA on behalf of our firm and he takes a quick look at the business plan. He decides that the deal isn’t for us and we don’t invest. Today, I meet someone different, doing something in a similar space and our firm decides to invest. Despite the fact that Brad doesn’t even remember the plan from 2 years ago (remember, we get a ton of plans over time) and I never saw the first plan, the original entrepreneur sues us, assuming that we must have stolen his idea, when in fact this is not the case.

As for your “real world” question, VCs do look at many deals, we do network, etc. Reputable VCs, however, aren’t going to go around town blabbing about your plans. Besides, if I pass on your deal, I really don’t see the reason why I’d want to talk about it.  And if I fund your deal, I’m certainly not going to do anything to injure my investment.  I might have lunch with someone and talk about some industry trends, particular markets, but unless this person is a close and trusted colleague, I’m not even going to go into too much detail, as I don’t want to disclose everything that I know.

What does happen quite often is that we get a business plan from a company doing something similar to what one of our portfolio investments does. In this case, as soon as I realize this, I stop reading and let the entrepreneur know that we have a similar company and that I’m destroying his plan. The key here is being completely transparent and open.

One more thing: We get tons of unsolicited business plans that are marked “confidential.” Keep in mind that you can’t impose a duty of confidentiality sending something unsolicited.

January 16th, 2007 by     Categories: General QandA    
  • http://leighhimel.blogspot.com Leigh

    Rick Segal has a great posting on this subject as well.
    http://ricksegal.typepad.com/pmv/2007/01/shhhh_the_promi.html

  • http://avc.blogs.com fred wilson

    one way to think about this is the age old adage that contracts can never protect you as well as good judgement. if you share your plan with an unethical person who does sign an NDA, you’ll be at greater risk than an ethical person who won’t sign an NDA.

  • http://ryanmapes.blogspot.com Ryan Mapes

    We run into this question all the time over at Go BIG–a community for startups. So, I wrote an article a couple of months ago on why VC’s won’t sign NDAs (http://ryanmapes.blogspot.com/2006/12/entrepreneurs-vcs-wont-sign-non.html)—it references a couple of other articles written by notable entrepreneurs who have been through the funding process. In short, VCs see thousands of deals a year and couldn’t possibly bind themselves with all of these legal documents. One way or another, they would inadvertantly slip up and could be held liable. Execution is really the key to any successful startup.

  • kit carson

    Honestly I think that it all boiles down to how well is written and balanced the NDA.
    With a good NDA, the “worrying case” mentioned would end up with the legal action promoted by the original entrepreneur swiftly rejected by the court.
    Reputation, whereas the flow of information is not perfect, can hardly be the only parameter to keep the VC ecosystem healthy.