This article outlines how you can protect your company when investors don’t sign NDAS. If you’re an entrepreneur and you’re bringing in investors, you’ll need to get them to sign an NDA before they invest in your company. But what if they don’t sign it?
The fact that potential investors won’t sign a Non-Disclosure Agreement (NDA) is often a problem for founders when sharing business ideas. NDAs protect businesses by protecting their trade secrets and ideas, but venture capitalists don’t typically sign NDAs.
A well-drafted non disclosure agreement can protect intellectual property of a company. It is a legal agreement between multiple parties. A party is subject to legal trouble if they sign the agreement. If they reveal any confidential information or use the information in unethical ways, they are subject to legal trouble. The agreement basically defines what information is protected and what isn’t.
Entrepreneurs believe that investors should sign an agreement to protect their company’s business plan and confidential information. This is especially important for competitors. Professional investors who have a lot of experience will almost always refuse the non-disclosure agreements.
Entrepreneurs are naturally concerned due l overwhelmed and scared when pitching to VC firms. They could even steal your idea. The VCs can steal your idea because they have the resources and money. It would appear to be foolish for entrepreneurs to simply hand over the business details without any protection.
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Reasons Provided By Investors for Not signing NDAs
VCs aren’t likely to sign NDAs because that is the industry stance. On average, VCs see 20-40 deals per week. This equates to 1,000-2000 deals per year. They could be prevented from looking at other investment opportunities by signing an NDA for every deal they make. Even if an investor signs the agreement, he/she must review it and keep track of compliance. Only a professional attorney can do this. Professional investors may find it difficult to justify the time and expense involved in completing this task.
One common reason as to why VCs won’t sign NDAs is they stand on their reputation. An investor who is successful maintains the trust and confidence of entrepreneurs. An investor who is known for revealing confidential business secrets to the market will quickly lose their trust. Investors need to have a good reputation. Investors who have a good reputation are more likely to be able to invest in great opportunities.
Another reason is that VCs want you to focus on the process of company building and not an idea. Entrepreneurs must understand that not every VC is interested to invest in their idea. They want entrepreneurs and their teams, not their ideas. Although an idea may seem simple, executing that idea takes hard work, dedication, and sweat. In their views, ideas are a dime a dozen, but only a few teams can make unicorns, and that is why NDAs are not needed.
Entrepreneurs may appear naive or inexperienced to potential investors when they request signed NDAs.
How To Protect The Company
Investors often advise entrepreneurs to share the recipe and not the cookie. The entrepreneur can decide what information they wish to share and what they would like to keep private. You don’t have to tell anyone if you have something extremely secret that is not available to the public. It’s that simple. It’s like asking an investor to sign an NDA.
If you’re looking for potential investors in the market, ensure you don’t find anyone who has made similar investments in other companies. Professional investors won’t invest in your company if they have made similar investments to you, but there is the risk of competitors leaking confidential information.
Before you pitch to investors, you should file a patent application. You can protect your invention with patent filings. Provisional patent applications are inexpensive and fast, and if you want. As discussed in our other blogs, you lose important patent rights when your technology is made public. If you plan to pitch your technology at public events where the recording may be made public, it is a good idea to file a patent application before you do so. These would be considered public disclosures. Investor pitches are usually done behind closed doors, so there is some implied confidentiality. This means that these disclosures don’t affect patent rights. It is important to file a patent application prior to meeting with investors.
It can help establish company credibility when you state that your product has a patent pending status. If you do this right, an inexpensive provisional patent application may allow you to state that your product is “patent pending” in the United States. Investors love it when you have an intellectual strategy and they are more inclined to invest in companies that can get exclusive access to the market.
You can also enter a pitch with patent pending status. This allows you to talk openly to investors without worrying about them taking your idea. Investors won’t be able to evaluate your company if you don’t want to or can talk freely about your product. If you try to get them signed a non-disclosure contract, you might be branded as an amateur. You might not realize it, but both will result in your company receiving a polite “no thanks” from investors.
The Bottom Line and Next Steps
These are the factors that affect whether or not a patent application is filed . The best strategy for startups would be to wait as long as possible to file their first patent application. However, it’s important to file before any public disclosure, public use, offer to sell, or meeting potential investors.
But even if you have filed for patent protection, you should still minimize discussing the how it works with your investors. Most investors don’t need the technical details. Imagine you’re opening a restaurant. You need investors. Real investors will need to know the following: When you plan to open it, where you will locate it, your business model, your theme (e.g., Asian cuisine), projected profit margins, supply lines, etc. All of this should be possible without an NDA. You don’t want them to know your secret recipe (i.e. the patent filing details). It is possible to talk about the benefits of your product (e.g. protein, detergents, medical devices, therapeutic codes, etc.). It is better than any other product on the market in terms of its benefits (e.g., it is cheaper, more efficient, a better cure for a disease, …). Talk about projected profits ($$$) as well as risk management. True investors will be interested in learning about these and less on how it works. In short, even if you have filed a patent application to protect an invention, don’t reveal any details about the actual invention. Trade secrets and patents can be expensive to enforce.
Your main challenge is to attract investors, not worrying about why VCs won’t sign NDAs. They will manipulate you with numbers. Things will be smoother if your first meeting goes well.