Why Investors Don’t Sign NDAs

We get asked all the time to sign Nondisclosure Agreements (NDA) by entrepreneurs. Simply put, we don’t do it except under very rare circumstances surrounding protecting IP. If unfiled IP is required to be disclosed, only then there is an argument for an NDA. It would be almost impossible to sign an NDA as an organization given the size, depth, and breadth of our network. For ACG, the problem is we are an angel group across 8 cities and hundreds of people. We must share funding applications with all to review, the entrepreneur will pitch to one of our funds or groups, which will be followed by national, albeit password protected, televised/archived pitch to our entire Alliance. This is a broad audience, each of which must make in individual decision to invest in the business or pass.

As investors, it is our job as to validate the claims of wild-eyed entrepreneurs, many of which are prone to hyperbole. That means we have to call experts within and without our investor, business, and personal networks to ensure that these claims do not violate the laws of man or nature. We have to determine if there is unknown competition in the market place. And, we must determine if there are competing solutions in the market that will interfere with a company’s ability to operate its business…especially if an entrepreneur is asking us to invest in that business. We can’t simply rely solely on the word of the entrepreneur. To pirate a well-known phrase, in God we trust, all others must go through diligence. We evaluate companies for funding, but we understand the need for confidentiality. We do not create a competing companies to our entrepreneurs. First, we all know how difficult, expensive, and personally exhausting it is to create a company. Second, It would DESTROY ACG as an organization to do so. I have seen a number of great business models, but none are worth destroying ours to do so. The one angel group I am aware of that allowed a member to steal an idea and create a competitive business to a pitching entrepreneur lost all credibility and was driven out of the industry over it. And, my understanding is there was legal action taken. So, ACG would be out of business in a “New York minute” if we allowed disclosure or theft of IP from an entrepreneur to create competition regardless of an NDA.

All our members have a confidentiality obligation in their membership agreements, but there are usually guests, who should sign a short, limited NDA to attend the meeting. That is policed by the Chapter President or Fund Coordinator. That confidentiality only extends between the investors and ACG, not to the presenter. However, ACG members are investors, not predators. Our ACG code of investor ethics prohibits it. We do not steal ideas from entrepreneurs. Period. The reality is no professional angel groups or VC’s will sign NDA’s. We can’t create a liability for ourselves simply by doing diligence on the company. If we sign an NDA and an entrepreneur believes we violated it in some way, or more likely, invested in one of his competitors, then he/she would have grounds to sue. We can’t create a liability for individuals, our funds, chapters, or Alliance by doing so.

Perhaps most importantly, there are many levels of discussion when dealing with IP from a high level overview of IP, which is rarely proprietary, to a low level bits and bytes discussion that gets to the root of the NOVEL invention. We usually just tell applicants to not disclose their secret sauce (low level stuff) if they require and NDA. If that is a problem for the entrepreneur, he/she can seek funding elsewhere or ask to sign an individual NDA with interested individual member(s)/investor(s), but our experience is companies that are too in love with their IP, or not smart enough to talk about the application and VALUE of their IP without disclosing the secret sauce, don’t do well with venture-style funding processes. They are better off to stick to family and friends that will be more forgiving and more willing to trust the entrepreneur.

With all that said, if the entrepreneur has filed patents, the need for an NDA is almost completely irrelevant. Once an entrepreneur has filed a patent, he/she can feel free in discussing his IP. Once filed, it is in the hands of the US Patent and Trademark Office (USPTO) to determine if he has a truly novel invention at the time of the filing and if he is the first to file the invention. And, a private conversation with an investor, or group of investors, in a private venue is HIGHLY unlikely to result in some disruption of the patent process. It would take an individual with patent attorney level knowledge, and an axe to grind, to have any real hope of interfering. So, we strongly suggest, rather than asking for a NDA, an entrepreneur file a provisional patent. They are cheap to file and give the entrepreneur a year of protection before a full utility patent is required to be filed for full patent protection. In that year, the entrepreneur can refine the true value of the IP and focus on protecting those aspects that make it unique and novel.

When an entrepreneur asks a venture investor for an NDA, he/she is showing naiveté. The simple answer to that entrepreneur is 1) to learn to discuss your IP in terms of its applications and value, and 2) be smart about IP protection in order render the need for an NDA null and void. Most investors, don’t require a deep understanding of IP so long as they understand the high-level information and believe it has great value as a barrier-to-entry for fast followers and creates a driver for M&A activity in the future. But, they will research the competition thoroughly. And, if there is any doubt of the validity of the entrepreneur’s claims, they will require low-level disclosure before investing. So, to the entrepreneur, do your homework! You will be called on it.

ACG does not disclose entrepreneur’s proprietary information. We don’t steal their ideas. And, we don’t compete with them. We are in this business because we want to benefit from the hard work of talented teams seeking to create life changing wealth and change the world. And, we like that arrangement.

Feel free to google “why investors don’t sign NDA’s.” There is a lot of material on the subject already published:

This was originally published under the Appalachian Regional Commission POWER Grant, PW-1835-M.

Copyright Appalachian Investors Alliance, Inc. 2018
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