A colleague recently brought me a BVCA standard NDA for signature that had been significantly marked-up by an entrepreneur’s adviser over the previous week. After a brief scan of the edits, I instructed her to revert to the entrepreneur politely declining to accept the edits and say that we would not be entering into an agreement on confidentiality. Within hours, we had received the entrepreneurs business plan and had engaged in a conversation about his exciting business. A week had already been wasted and the entrepreneur had received poor advice.
We refuse to sign NDAs, unless there is a clear and genuine reason for doing so. We are not alone. Almost all leading VCs will not sign them and in the US, they are all but extinct. Why is this? And why you shouldn’t care about them…
1. The law of numbers
Each year we invest in three to seven new companies. Each new investment is the product of deep analysis, negotiations, business planning, due diligence and a stack of legal agreements. The process is intense and thorough, lasting for weeks or months. It is also the product of sifting through many investment opportunities. Our proactive and reactive research leads to over 1,000 investment opportunities being screened each year. It is a vast number and the screening is brutal, but we hope, honest and fair. If each one needs a NDA, even if standardised, we would never be able to engage with so many entrepreneurs and be bogged down in a mire of legals. Keeping track of so many agreements is logistically challenging, and time ineffective.
2. You may be ill-advised
Over half of NDA requests come from advisers, often trying use the NDA to secure their own position in a deal. This immediately forms a first impression and a calculation that goes: Difficult adviser + complex legals at first hurdle = most likely a poor investment opportunity. Of course, we want to give the benefit of the doubt. Our profession is looking for needles in haystacks, but the practicalities mean we have to be ruthless.
3. We are looking for originality
But in practice, it is rare. Most business plans we see are a about better mousetrap, an improvement, a new twist, a new approach. Often it is about tapping into emerging demand, exploiting an unmet need or driving efficiency in businesses or markets. All are valid reasons for a start-up and may be fundable. But a truly unique opportunity is less common. Is your idea so special it really needs a NDA in place before we can speak?
4. Reputation is our bedrock
Our industry is made up of (mostly) bright professionals that are passionate about growing companies with inspirational entrepreneurs. Reputation is everything. In the age of the Twiter-sphere and Facebook-Likes, news of a VC screwing an entrepreneur by breaching confidentiality will travel at the speed of light and their ability to close a quality new investments will fall sharply. There are many ways of finding out information about your business and if it leaks, it is unlikely to have come from a VC.
In a quick poll of my colleagues, none of us can recall ever being asked to check back on a NDA we signed in the past. Some entrepreneurs or advisers have been insistent that we enter into one, but they are never referred to again. Further, we are not aware of any VC or entrepreneur going to court over a breach of NDAs. This suggests they are never used and that time has been wasted. At best you have been through a box ticking exercise.
6. Due diligence phase may be the right time
As we get to know each other and learn about our respective businesses, we will have conversations about confidential information. Our standard shareholders agreements have certain confidentiality clauses built in, but we accept that from time to time, it may make sense to enter into a NDA as we enter the due diligence phase. Sharing information on specific customer contracts, undisclosed IP or code is clearly sensitive and we understand that it may be appropriate to enter into a confidentiality agreement. But let’s get to that stage first.
7. It’s about you and us
In the end, investing in your business is a partnership that is likely to last a long time. Perhaps longer than your kids are at primary school or than you will own your car. From the first meeting or interaction, we are looking to form a relationship based on trust and ambition. On the roller-coaster experience of you entrepreneurial journey, there will be good and bad times, highs and lows. If there is a partnership of trust in place, the chances are, together, we will emerge from them successfully. Is an NDA really the best starting point?
So think twice about asking a VC to sign a NDA. And be sceptical if your adviser insists that NDAs are put in place. It might improve your chances of getting funded and reaching your full potential as an entrepreneur.
Co-founder of Oxford Capital Partners. Husband, father, adventurer and polar marathon runner. Represent Great Britain at master level in Modern Pentathlon.