- When you're raising venture capital, it's as important to know what not to do as it is to know what to do. One of the great examples of something not to do when you're talking to venture capitalists is to ask them to sign an NDA. If you have a typical lawyer, one of the things a lawyer will do early on in the life of your company is give you a form that's called an NDA, or a non-disclosure agreement. They'll basically say, whenever you meet with somebody, have them sign this so that they don't inadvertently disclose information, or if they do, then you have a legal right to go after them for some reason.
NDAs are a particular document that generally don't have a lot of teeth to them from a legal sense, and more importantly, no VC will ever sign, at least no credible VC. The reason is is that whatever you're sharing with the VC in the context of your financing is something that you should assume that that information is something that the VC would comfortably share with their other partners or potential co-investors or other reference points that you have. If you operate from that frame of reference, you're fine.
If you don't operate from that frame of reference, and you think you're giving a VC information that they're never going to share with anybody, you're probably going to be unhappy. Now, why shouldn't you ask them to sign an NDA? They can't possibly keep track of all the information they get from lots of different entrepreneurs. So, really, you're depending on the investor's reputation to not use whatever information you give them inappropriately, versus a legal agreement, such as the NDA, to prevent them from doing something. For example, if I had to sign an NDA every time I talked to an entrepreneur about their business for the first time, I'd have to sign 50 NDAs a day, and there's just no possible way I could keep track of that, let alone want to read each NDA and make sure that there was nothing in that NDA that I was agreeing to that I was uncomfortable with.
So, industry practice has become such that VCs just don't sign them. Again, from the entrepreneur perspective, you're dealing with an ethical venture capitalist. The chance of them sharing that information without asking you first with somebody that you might not want them to share it with, say, another portfolio company of theirs, is pretty low. However, it's useful as an entrepreneur to know that there are plenty of VCs that will do that. And so, just make sure that whatever you're sharing with VCs is information that you're comfortable being out in the wild versus trying to create some situation where you're protecting that information.
- Exploring potential stakeholders: friends, family, and more
- Finding a venture capital firm
- Breaking down the term sheet
- Taking on debt
- Asking for NDAs
- Accepting a no