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Why Startups Shouldn’t Bother About NDA’s

OMG, this must be Recurring Themes Daysmile_wink  Just done with the Your Blog is Your Resume theme (this one pops up about once a year with almost predictable regularity), and am now worried about Alexander Muse’s health.  He’s a healthy strong man, but wants to shoot himself if he receives another NDA.  He quotes Rick Segal (sorry, Rick for taking it verbatim, it’s just too entertaining…):

VC firms typically do not sign NDAs for first looks/meetings.

VC firms typically do not sign NDAs with promises not to evaluate the same or similar businesses included.

VC firms typically do not sign NDAs with 5 year no contact clauses included.

VC firms typically do not sign NDAs with promises to report any contact with competitive businesses included.

Rick is a Canadian VC, and his firm has received 35 NDA’s so far this year. But here’s the best part from his post:

Repeat this 10 times before you go to bed tonight:

I will not send an unsolicited beautiful leather bound binder with 600 hundred pages of detailed business, marketing, competitive, and financial information about my business along with an unsigned NDA and a request for it to be signed and returned to any VC.

It arrived in my office on Thursday and the binder was off the charts nice.

Don’t ever do it. Really. Just send the nice leather binder without all the crap. smile_tongue  Unless you’ve discovered a new Conspiracy Theory (but you wouldn’t send that to a VC, would you?) don’t send hundreds of pages.  Your page limit for first contact is one, perhaps two.

Back to the NDA theme, now that we’ve  seen how VC’s hate them, let’s look at why startups shouldn’t bother about them anyway:

  • As an Entrepreneur it is often in your interest to share WHAT you do, as a way to solicit feedback, concept validation
  • If there is a “secret sauce” of HOW you will do it, you should not share it anyway, NDA or not – not until further down the road as part of due diligence with a committed investor
  • Since it’s commonly known that investors do not sign NDA’s, asking for it is akin to displaying a banner: “Newbie Here”

These were originally Dharmesh Shah’s points, and my addition:

  • If the information you reveal during the presentation is enough for a competitor to jeopardize your position, than you really don’t have anything substantial to justify an investment. Your time would be better spent on product development.

 

Finally, a side-note to Alex (and all):  RFP’s are also a waste of time.  Extraordinary effort on formalities, and most RFP’s are issued as CYA,  to cover up the fact that the prospective Customer already has a preferred vendor / solution provider.  If you’re in the public sector, there’s no way around them, otherwise avoid RFP’s – there’s always other business to go after.

Comments

  1. I agree. Requiring a VC firm to sign an NDA often has the reverse effect. They ask themselves, “what is this guy hiding” instead of seeing it as a “I’ve got something so amazing, that the three-letter government agencies can’t even know about it”. MOD Director

  2. In my opinion, “Soliciting Feedback” is the single most important reason for being open about your ideas.
    Obviously NDA is a bad idea most of the time.

  3. Really NDA is a bad idea every time 🙂

Trackbacks

  1. […] on March 18, 2008 While we’re on the subject of obsolete paper artifacts like resumes, Zoli Erdo brings up the topic of NDA’s.  Specifically, that VC’s won’t sign them.  Most big […]

  2. […] Zoli Erdos and Alexander […]

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