Pro and Cons for Using an NDA When Pitching an Idea
Whether you’re looking for investors or business partners, you don’t want to give away your good ideas and leave yourself vulnerable. But you also don't want to turn off potential investors. Understand why you may (or may not) want to consider an NDA when pitching your idea.
If you’re taking your business idea to investors, you want to protect your idea. After all, many venture capitalists and angel investors work with a variety of people in the same industry, so all it takes is one slip of the lips for them to destroy what could have been a successful business for you. Sometimes they deliberately share ideas they’ve learned in pitch meetings (especially if they decide not to invest in your company) to help make their other investments even more lucrative. It’s not nice, but it’s part of the game.
If you’re looking for business partners, it’s the same problem. You want to find a partner that’s a good fit with your business, but you don’t want to reveal too much too early.
So what’s the best way to go about protecting your information?
Cons of Non-Disclosure Agreements
The problem with asking investors to sign an NDA, at least too soon in the game, is that it’s a turn off to them. It shows that you guard your idea too closely and aren’t willing to let people see it to offer suggestions. It also shows you’re a rookie.
Asking some investors or business partners to sign an NDA may cause them to walk away. Some want to build a professional relationship built on trust with you, and asking them to sign a confidentiality agreement is the equivalent of asking a partner to sign a prenuptial: it insinuates distrust.
Investors see dozens of small business owners every week, all with amazing ideas. Signing an NDA for each one is simply a waste of time, at least in the early stages. If you’re not able to talk about the concept of your business without an NDA, it’s likely you don’t have a sustainable idea anyway.
Also know that it’s difficult to enforce an NDA, as legal processes take longer than you’ve probably got to take back the information that is yours. By then, you may have dozens of competitor clones, and there’s no ruling that can change that fact. Consider going without an NDA and hope for the best.
Pros of Non-Disclosure Agreements
NDAs are contracts that bind an investor or potential business partner from mentioning sensitive information outside of his relationship with you. They can keep your trade secrets or technology secret from your competitors, which can give you an edge when it comes time to launch your product.
If presented at the right point in pitching a partner or investor, a non-disclosure agreement can fit in perfectly. But before you present it, make sure you’ve answered these questions:
- Is there a market for this idea?
- How will it make money?
- Will people buy it?
Once a potential investor is satisfied with the answers to these questions, and you’ve given him enough of a high-level concept of your idea, it’s time to delve deeper, assuming he’s still interested.
The confidentiality agreement will protect you, while allowing him into the inner sanctum of your business (or mind), where you can talk about the competitive advantages you have in design or technology. Any VC or angel who is considering investing in your brand should be prepared to sign the agreement in order to move forward. The key is presenting it at the right moment.
Rule of Thumb
The best rule of thumb when speaking to partners or investors is to guard your secrets closely. It may not even be necessary to tell them all while still getting across what you need to to take the relationship to the next level. A potential investor may not even need to know specifics on your product design if he sees the merits of the product in its market and the potential to make money.
NDA or not, you should only reveal information on an as-needed basis. It’s better to have to continually give out information as it is requested than to throw it all on the table unnecessarily.