Should You Pursue a Non-Disclosure Agreement with Venture Capitalists?

Most venture capital (VC) firms won’t even discuss signing a non-disclosure agreement early on in the conversation and companies that push this issue put themselves at a disadvantage by showing a lack of understanding of the investing environment and norms.

When you first talk with investors, determining what you should share and what you should keep secret can be hard. Make it easy: If it’s secret, keep it secret. Generally, intellectual property protection covers some aspect of the technology. You really don’t need to share the details until you are deeply into due diligence.

Similarly, avoid bumping up against secrets in conversation. You don’t want to tease anyone with a sentence that ends abruptly in “Um, never mind, I can’t tell you that.” Find ways to gloss over the secrets or to describe your technology so simply and at a high level that the secret isn’t touched upon.

Frankly, most secrets are pretty specific and rarely does the conversation turn that way. If an investor asks why your therapeutic works better than others, you don’t have to tell him that it’s because you are using the stereoisomer. You can simply say that you found an important change in the molecule that made all the difference.

Talk with your team about how you’ll discuss the secret sauce without uncovering the secret. Generally, initial discussions with investors will revolve around the commercialization of the product and the business model.

Investors will trust you that your technology can do what you say it does — at least at first. Your goal is to be able to share that you have secrets associated with a certain aspect of the technology and perhaps that you have them protected with a patent filing.

Know when to ask for an NDA

Investors can’t sign nondisclosure agreements (NDA) before they see your pitch or talk to you about your deal. The liability is too great for an investor to agree to nondisclosure until the VC and company enter into full due diligence.

Here’s why: An investor may see three or four companies with very similar technology or business plans. The companies often do not know that the others exist because all of them are still stealth (code for “haven’t put up a website yet”).

Later, one company may think that the investor shared its secrets with the second company, when in reality both companies came across the same idea independently. Signing NDAs puts VCs at risk for future lawsuits, so it is not something that they take lightly.

After the VC begins due diligence, an NDA may become part of the agreement. If the company has manufacturing or laboratory space, the investor may sign an NDA before doing a site visit.

Keep your secret sauce a secret

Even with a signed NDA, you can — and should — keep some secrets under wraps. Consider which secrets are truly protected by patents (and therefore okay to share with investors) and which should simply remain trade secrets until the VC has invested. Talk to your patent attorney to determine which is which.

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