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What Do I Do If Potential Investors Won’t Sign An NDA?

I talk all the time with investors who get annoyed when small businesses and startups try to get them to sign an NDA.

Even asking potential investors to sign an NDA is an instant sign that you are a total newbie to fundraising.

There is a reason for this.

Most savvy investors will not sign a Non-Disclosure Agreement (NDA) or at least not early on. This is because an NDA is basically a hunting license for suing people.

Does that sound harsh? “I allege that you disclosed my confidential information. Now pay your attorney a lot of money to prove you didn’t!”

The goal of a potential investor, especially an institutional investor, such as a venture capitalist, is to quickly determine if your business is worth investing in. It’s a numbers game for them so they meet with lots of potential businesses. For them to sign everyone’s NDA would expose them to massive and unnecessary risk, which defeats the whole purpose of them meeting with you in the first place.

So how do you protect your intellectual property without an NDA? Do not tell them the recipe for your secret sauce!

Imagine that you are opening a restaurant and you need to find investors. A real investor will want to know when you plan to open, where it will be located, what your business model is, what is the theme of your restaurant (e.g., high-end Italian), your projected profit margins, do you have secure supply lines, etc.

You should be able to tell them all of that without an NDA. What you don’t want to tell them is your secret recipe for making your sauce (i.e. invention).

You can talk in terms of benefits: why your improved product (e.g., protein, detergent, medical device, therapeutic, computer code, etc.) is or will be better than anything else out there in terms of its benefits (e.g., cheaper, more effective, unique, cure of COVID-19). You can talk about projected profits ($$$) and risk management. They’ll definitely want to know about those.

Just don’t disclose anything about how to make your actual invention (your secret sauce), even if you have already filed a patent application to protect your invention. Patents and trade secrets cost money to enforce. Keeping your mouth shut is free. Try it if you don’t believe me.

I trust secrets and I’m not alone. One of my favorite quotes is by Benjamin Franklin, “Three can keep a secret, if two of them are dead.” This doesn’t mean you should try killing potential investors.

If an investor does push to understand how your technology works, then you should insist on an NDA. But that usually doesn’t happen until the A or B round of fundraising – right before they sign a big check. At that point, the risk of signing the NDA is the last thing they are worried about. Also, it goes without saying, you should consult a patent attorney BEFORE disclosing your invention OR selling it to anyone.

Are you unsure what to do next?

Call Childs Law at 832-621-0353 to schedule a complimentary consultation with me and I will be happy to discuss how best to protect your invention. We’re available Monday through Friday to answer your questions.

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