Why Startups Shouldn’t Bother About NDA’s

Dharmesh Shah, Angel investor and repeat Entrepreneur himself talks about why startups looking for funding should not pursue an NDA (other than the fact that investors won’t sign it anyway). His three key points:

  • 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”

I’d like to add a fourth point, which becomes a reality-check whether you should seek funding at all:

  • 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.

I mostly work with software startups, and I think it’s safe enough to claim that in this field concepts do not get funded. You need a prototype – partial functionality, alpha, demo (not slides!) ..etc, and some form of market / customer validation. Anything less is just fluff.
That’s software; obviously if you are about to revolutionize chip technology, that’s more asset intensive and you will not be able to develop a product pre-investment. You may get funded on the concept, but in that case the other key component is the credentials of the genius PhD-team you have assembled.

Either way, it’s the “substance” beyond a 30-min presentation that gets funded. If you have it, no need to worry about revealing the basics – if you don’t, save your time ….

Update (6/13): Rick Segal on the funny (stupid?) practice of trying to “slip in” an NDA.

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  1. in turn VCs should resist asking for non-competes, non-dilutions etc. BTW a vendor we both know wanted me to sign a 10 year NDA …what stays steady in our industry beyond 30 days…we have way too many non’s in our business – keeps attorneys busy

  2. Anonymous says

    Zoli, our industry has way too many non’s – NDA,s non-competes, non-dilution. Then it becomes whose attorneys are more intimdating. At Gartner we would not sign NDAs but were anal about non-competes. You know how VCs are about non-dilution. Every one has a good justifcation which comes down to my interests are somehow unique. I had a large vendor wanting me to sign a 10 year NDA. what stays steady beyond 30 days? We are a smart industry refusing to acceopt that most of this is non-sense…

  3. Anonymous says

    Oh, I’d say go ahead and sign the 10-year NDA, just make sure to have upper 7-digit comp for doing so 🙂

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