As the chair of a community-based angel investment fund, I receive a lot of meeting requests from business owners that want to have a conversation about raising money for their business. These entrepreneurs usually have minimal business development and fundraising experience and are looking for a way to fund their future growth. I rarely get much out of taking these meetings, but I almost always take them because I think it’s important for business owners to know what types of capital are available to them and what the most appropriate type of capital is for their business.
Unfortunately, some of these meetings never get to happen. Sometimes business owners think that they need to protect their idea and ask me to sign a non-disclosure agreement (NDA) prior to meeting with me. While not having an NDA in place is usually not a deal breaker most of the times, there are meetings that I would have been glad to take that simply didn’t happen because I refused to sign an NDA. When someone asks me to sign an NDA prior to meeting with them, my standard response is that I don’t sign NDA’s under any circumstances. This inevitably leads to the question “Why not?”. This post is an attempt to answer that question.
Here are six reasons I won’t sign your NDA:
1.Your NDA probably isn’t necessary.
Most people want to put an NDA in place to protect their business idea from being copied or discussed widely prior to launch. You might have a great idea, but I don’t have the time or the interest to copy it. I run a multi-million-dollar financial marketing business and I wouldn’t have the time to copy your business idea even if I wanted to. I treat these conversations with a lot of discretion. If you can’t trust that I’m not going to tell everyone about your idea and your business unless we have an NDA in place, you probably shouldn’t be having coffee or lunch with me in the first place.
2. Your NDA may not be legally valid.
Whenever you sign a contract, you are legally agreeing to do something (or not to do something) in exchange for some piece of consideration (payment). All contracts require some form of consideration to be considered legal and valid. Since there is no consideration provided with the non-disclosure agreement you’re asking me to sign, there’s a significant doubt as to whether your NDA will hold up in court.
3. Your NDA creates a legal liability for me in exchange for nothing in return
If I were to sign your non-disclosure agreement, I would be legally obligated not to discuss or not to compete with you on certain products or services. It just does not make sense for me to ever give up any legal rights so that I can help you out with your business idea. If it turns out that I had already been working on a business idea in a similar space or been talking to a friend who was working on a similar business idea, I would be legally obligated to stop working on that business idea or discussing that business idea with anyone else that was working on it. Why would I agree to limit my legal rights in exchange for nothing in return? I wouldn’t. Nobody would.
4. Your idea has no value until someone executes on it.
I have Evernote files filled with million-dollar ideas that I haven’t ever executed on. Almost everyone has a great business idea in the back of their mind that they never did anything with. The reality is that most business ideas already exist in some form or another whether you know about it or not. Even if you have a brand-new business idea that the world has never seen before, the value of your business idea is zero until you execute on it. The value in business ideas is in the execution of said ideas, not in the ideas of themselves.
5. You shouldn’t rely on an NDA to prevent someone from copying your business.
You should not need any kind of legal protection in place to discuss your business in high-level terms. If you feel the need to legally protect yourself from me in an initial coffee meeting, it tells me that you don’t have all that great of a business idea. How do I know this? If the only reason someone hasn’t successfully copied your business yet is because they don’t know about it, you don’t have a very good or defensible business model. If you have a great business idea that’s never been done before and the only reason a competitor can’t copy your business is they don’t know about it, they will make a competing product as soon as you gain any traction and crush you like a bug. If you really want to protect your business idea, you need to develop intellectual property (patents, trademarks) so that competitors couldn’t legally copy you even if they wanted to.
6. Asking for an NDA sends the wrong signs.
If you ask me to sign a non-disclosure agreement as the first step to discussing your project, that sends some strong negative signals to me:
- It tells me that you likely have minimal business experience and probably haven’t built a successful business before.
- It tells me that you are underestimating the importance of execution and overvaluing your idea.
- It tells me that you want to rely on the law rather than trust and a relationship that I won’t blab your idea to the world.
- It tells me that you don’t want anyone to know about your idea, when you should be telling everyone in the world about your business idea (this is called marketing).
- It tells me that you are cutting yourself off from valuable feedback. If you’re not willing to talk to me without an NDA, you probably haven’t been sharing your ideas with potential customers either.
Wrap-up
There are some circumstances where it makes to sign a non-disclosure agreement, but they are relatively rare and usually narrow in scope. The only time that I have signed an NDA in the last five years was in the negotiation of a sale of a business. If you ask me to sign an NDA, the answer is almost certainly going to be no. I’m usually happy to give you the lay of the land when it comes to fundraising or other topics, but I won’t sign your NDA for the privilege of doing so.