To NDA or Not to NDA, this isn't really a question...

There is a stain of thought, one prevalent in the venture capital community and elsewhere, that NDAs some how mark you as a novice, neophyte, or worse, a rube.

This line of thinking starts from the moderately dubious premise that VCs are all honest money, and they are too busy being efficient stewards of capital flow to even contemplate, let alone effectuate, the misappropriation of the finer points of your next big thing(TM). Secondly, the argument flows, if investors signed NDAs, what is to stop jilted Founders from suing them every-time the failed to back their company over a competitor. "Law suits are expensive, and we just don't want to risk exposure for an unlikely event."

I tend to find this reasoning akin to a hotel telling its customers that they don't provide locks to the room doors. The reasoning would be "Locking your door is, in essence, an insult to the ethics of our employees, and it passes a cost in terms of "locks" onto hotel, which is impermissible." Agreeing to this is totally reasonable, right? The odds that someone is going to break into your hotel room are statistically slim, so why worry about locking that door, or even have locks to begin with?  A hotel break-in is a low probability, high impact event. One that has an absurdly low risk control component. The cost of locking your door is low to you, given the potential down side of not locking it.  The cost of the Hotel providing locks to all its doors is high given how often people break into rooms.  

Therein lies the rub. Whose job is it to manage risk. The customer, or the seller.

The truth is that VCs see hundreds of companies, lots of time these companies are direct competitors to your company.  No amount of NDA language is going to give you complete comfort that some portion of your next big thing isn't going to get passed around like a handle of fireball at a Tennessee wedding.

However, that doesn't mean that you shouldn't make sure that you protect as much as you can. Big capital players usually have some form of internal control to at least minimize law suits, so it is not the end of the world if they don't sign, remember execution is much more important than  conception.  But ask questions, be knowledgeable about how they safeguard confidential information. If there are no locks, are there burly security guys on every floor?

However, if you are dealing with small angel investors and syndicates (potentially first time investors) that might a) not have the institutional controls, and b) internal discipline to keep things confidential, then make sure that you are using some form of NDA. Some of the smaller players might not have the systems in place to protect information, so a NDA can focus the mind. If you are dealing with anyone less than a household name in the industry, there is no harm in the ask. 

Asking for NDAs goes beyond investors. If you are outsourcing any part of your Dev team, NDAs are a good way to get people on the same page, as well as giving you legal recourse for straight up IP theft. (This does happen, regardless of what people tell you.)

All things being equal, even if no one agrees to sign an nda, you can still protect yourself.  We advise filing low cost provisional patent applications that cover your pitch deck. That way, even if your disclosures become public knowledge, you still have the potential of protecting the IP through the patent office. 

Never forget that VC money is not doing you a favor. Their job is to allocate capital, maximize return, and minimize risk. It is not your job to make their job easier by not protecting your intellectual capital.

Jordan Garner.