Do you really need your investors to sign a non-disclosure agreement (“NDA”)?

Non disclosure agreement document with pen

Startup founders are generally extremely protective over their business ideas.

And they very well should be.

While it’s become highly fashionable in the startup world to thumb your nose down on entrepreneurs who’re more concerned with their ideas than actually starting the business (as startup hipsters like to say, it’s all about execution), the fact is that save for a few select situations, you’re probably better off without an NDA.

Now, in case you’re not already familiar with what an NDA is, an NDA is basically a legal contract between two parties outlining the confidential material, knowledge, or information that the parties wish to share with each other for certain purposes. In a nutshell, it’s a contract through which the parties agree not to disclose information covered by the agreement.

Generally, entrepreneurs try and convince others (such as potential investors, consultants and developers) to sign an NDA in a bid to protect what they perceive to be a valuable market opportunity or idea. There are a number of other reasons why you would want someone to sign an NDA but for the most part, startup founders tend to be most concerned about protecting their ideas.

Why you shouldn’t ask potential investors to sign an NDA

Sadly, it’s generally considered amateurish in the startup world to approach an investor with an NDA in tow, and is usually seen by potential investors as something only a newbie entrepreneur would do. Many angel investors and even more venture capitalists refuse to sign NDAs outright. Some Singapore-based venture capital firms even explicitly state so on their company websites.

1). http://digitalmedia.vc/faq/

2). http://www.monkshill.com/faq

3). https://tri5.asia/apply-now/

The reasoning behind this is simple, and it’s not because investors are greedy, Gordon Gecko type who want nothing more than to steal your world-changing ideas.

The harsh reality is that investors and venture capitalists face startup pitches on a daily basis. Your groundbreaking FinTech idea really probably isn’t all that groundbreaking.

The fact that they come across so many entrepreneurs pitching ideas across so many different industries makes it more than likely that they’ve heard a similar pitch, even if the idea isn’t exactly the same.

Things can get messy real quick. For example, imagine that you pitch a venture capital firm your golden idea and you’re turned down. A couple of weeks later, the venture capital firm decides to fund a company with a similar idea. It’s not too far a stretch to think you might come to the conclusion your idea has been ripped off.

Practically, it makes a lot more sense for an investor who sees a lot of pitches to refuse to sign NDAs from the start rather than get entangled in a web of endless contracts, and running the risk of never really knowing when they might get into a potential lawsuit.

While it is certainly possible that not having an NDA signed opens you up to the chance of being screwed by an unscrupulous investor (it’s extremely unlikely a venture capitalist or angel investor would want to execute your idea but such investors could definitely share your idea, data and insights with their portfolio companies), most angel investors and venture capitalists have an incentive to be ethical in their dealings. The startup community in Singapore is still fairly small and word about unethical dealings travels fast.

That said, outside of the investor community, potential consultants, suppliers, employees and customers are usually a lot more receptive to NDAs. Whether the NDA can actually protect your idea is another question altogether, and will be explored in further detail subsequently.