Speaking with hundreds of public and private companies each year, I am often asked to sign NDAs. While there are certain situations where signing an NDA is warranted, all too often signing an NDA is an unnecessary complication. So, why won’t I sign your NDA? For four simple reasons (five if your a public company); (1) I don’t want to steal your idea, (2) NDAs create unnecessary liability, (3) signing an NDA can potentially limit me from working with other companies, (4) I don’t need the recipe if I don’t even like the cookie, and (5) (as a public company) your material value proposition should already be clear to the public!
(1) The first point, “I don’t want to steal your idea“, is usually the biggest concern for CEOs and the silliest for investors. I see boatloads of great ideas every year, but very few actually turn into successful businesses. A successful business is made up of much more than a good idea. (That being said; time, knowledge, and passion are very important ingredients for success.) Like most investors, my time, passion, and brain power is dedicated to doing deals not stealing other people’s ideas.
(2) The second point, “NDAs create unnecessary liability“, is easy for those with a basic level of legal knowledge to understand. Signing an NDA, that covers a specific time period creates long term liability relating to a company I may only speak with a few times. Of the hundreds of opportunities I see, only a select handful turn into actual deals. If I signed an NDA with every company that never turned into a deal, I would have hundreds of NDAs to keep track of! Not to mention the best way to limit my liability would be to have my attorney look at the document. My attorney would then have comments that you would need to run by your attorney turning signing a two page document into a time consuming and expensive ordeal.
(3) Our third reason, “I can potentially be limited from working with other companies“, is related to point two. NDAs often have language that attempts to (or can be construed to) limit the parties from working with other companies in similar industries, with similar business models, etc. This creates tremendous liability for an investor who looks at hundred of deals a year, particularly if that investor specializes in a specific industry or niche. If I signed an NDA with everyone I spoke with, I would soon be unable to speak with anyone!
(4) The fourth and perhaps most simple reason is “I don’t need the recipe if I don’t even like the cookie“. For investors, the most important information isn’t how you make your cookie, it’s how your cookie tastes! Investors want to know that your cookie is good and that it will sell. Once we know the cookie will sell we may wan’t to know about the ingredients. This is also a good point to consider when presenting to investors. If you have a great app, service, medicine, technology, etc., don’t complicate things with the technical’s of how it works. Talk about how it makes money!
(5) An additional point for public companies is that investors don’t want to come over the wall, especially during early conversations! If public and non-material information can’t explain the opportunity, then you have a bigger problem than NDAs. As a public company, your value proposition should be clearly available to all potential investors and any significant material information should be made public within a week of its occurrence. Now, some CEOs think having investors sign NDAs has something to do with insider trading. Insider trading is illegal and most legitimate investors have a lot more to lose than they have to gain by trading on inside information.
So now you know why investors don’t like to sign NDAs! If you don’t want to take my word for it, check out these other sources:
Ben Kotch is a managing director and investment committee member at Acquis Capital, LLC, a private investment firm that specializes in acquisition funding. He has extensive experience with both private and public companies. Ben graduated with an economics degree from Bentley University where he concentrated in entrepreneurship and law.
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