Why Venture Capital Firms Don't Sign NDAs and What non-VCs Should Learn From Them
When entrepreneurs pitch to venture capital (VC) firms, they often ask for Non-Disclosure Agreements (NDAs) to protect their ideas. However, most VCs refuse to sign them—and here's why:
1. Constant Exposure to Similar Ideas
VCs evaluate multiple startups and business models regularly. Signing an NDA could expose them to countless legal risks and prevent them from backing similar ideas that may arise from other founders.
2. Trust in Confidentiality
VCs work with a reputation for trust and confidentiality. Rather than using NDAs, they rely on professional ethics and the understanding that entrepreneurs’ ideas are protected by the competitive market.
3. Efficiency and Speed
NDAs can slow down deal-making. VCs prefer to quickly evaluate ideas, and lengthy negotiations over legal agreements can hold up the process. This may sound familiar to you non-VC companies!
Example: Waymo LLC v. Uber Technologies, Inc.
The federal case centered on allegations that Anthony Levandowski, a former Waymo engineer, downloaded confidential documents related to Waymo's autonomous vehicle technology before leaving to found Ottomotto, which Uber subsequently acquired. VC firm Kleiner Perkins backed both companies but had avoided signing NDAs.
This case underscores the complexities venture capital firms face regarding NDAs. Even when not directly involved, VCs can become implicated due to their investments in multiple companies within the same industry. Such situations highlight the challenges of maintaining confidentiality and avoiding conflicts of interest.
While NDAs may seem essential, VCs generally rely on informal trust to protect both parties in business negotiations. Startups shouldn’t ‘bet the house’ and share proprietary information that puts their core business at risk. Instead, startups have to think intentionally about what information they share with potential investors.
So, what can non-VC companies learn from this?
There are a lot of companies that originate M&A deals, evaluate new products from a host of vendors, or work in real estate or project development, but outside of the VC-world, NDAs are the price of entry to doing business in these circles. So what should non-VCs do about the conflicts it can create for their businesses?
Get an attorney to review and negotiate your NDAs. Yes, it is time consuming and costly, but most standard NDAs will include overly broad restrictions, carefully veiled terms that prevent you from pursing your normal business. For example, I had one client that signed two different NDAs with project developers that had ‘non-circumvention’ clauses. The clause restricted my client from pursing a real estate development project if the project opportunity was presented by the developer. Both developers presented the same project opportunity to my client days apart. Meanwhile, my client was contacted directly by the project owner for the same deal (except with no commission charge). My client had to pass on the opportunity because they would have owed commissions to two different developers or risked violating both NDAs. A lawyer with specialized expertise is well worth it. Law firms like Norton Rose offer custom services with quicker turnarounds.
Or, Join The Nada Group and skip NDAs. VCs have way power than startups, so it’s easy for them to turndown NDAs, but for the rest of us, we can’t talk business without an NDA. Until, that is, The Nada Group. Like VCs that rely on their reputations and trusted networks, The Nada Group has formed a network of companies that are instantly ready to talk business (without signing additional NDAs). The Nada Group is a central contracting party that monitors and enforces confidentiality in early stage business negotiations (without superfluous restrictions like non-circs and non-solicitation clauses) for a network of vetted and insured companies.
