Non disclosure agreement for investors refers to a deal between at least two parties, that makes one of them legally responsible for revealing any information marked as confidential. The agreement should clearly specify what classifies as confidential information.

In the case of startup companies, a well-written non-disclosure agreement protects the newly-founded company's intellectual property. This is a crucial step in dealing with potential investors because it prevents situations where confidential information could be revealed to competitors or the investor attempting to steal the new company's business plan and replicate it. Most investors, however, always refuse to sign such agreements when dealing with startups, making a founder asking for such a deal look inexperienced and naive.

Why Professional Investors Don't Sign an NDA

A professional may refuse to sign a non-disclosure agreement because of legal or trust issues, expenses, or loss of reputation.

  • From a legal perspective, a non-disclosure agreement severely limits a potential investor's possibilities. Most such investors analyze hundreds of companies and business plans in order to decide where to invest. Therefore, signing such a large number of non-disclosure agreements would create conflicts of interest, especially in situations where the investor's past experience with other companies may prove valuable when advising a startup.
  • Another major issue stopping investors from signing non-disclosure agreements is trust. A very important element in the relationship between founders and investors is mutual trust, and asking the investor to sign such an agreement is likely to be perceived as a sign he or she is not trusted by the other party. It also diminishes the investor's trust in the founder's business skills or moral qualities, undermining the relationship from the start.
  • Drafting such a contract also creates additional expenses. Hiring professionals to review the terms of the deal is also an extra cost for the investor. This consumes time and resources.
  • Not disclosing crucial information about a startup is in the investor's long-term interest because if that particular investor gains a reputation as someone that cannot be trusted it would certainly hurt their chances of other startups working with them in the future. It's a situation where the market tends to regulate itself, eliminating the need for a non-disclosure agreement by making it in everyone's best interest that confidentiality be kept.

How Startup Companies Can Protect Their Intellectual Property

The best way for a startup founder to protect intellectual property when discussing a potential investment is, first of all, to carefully select any potential investor based on referrals and reputation. Then, in initial meetings, the big picture must be presented to the investor, instead of crucial information and technical details regarding the business. That information can be gradually divulged later on as the relationship grows stronger.

There are exceptions to the rule that says a founder should not ask an investor for a non-disclosure agreement. Such situations may be when some specific information or idea has not been patented yet or when the company in question is not a startup but a larger, more well-established enterprise looking for investors. The best way to proceed in such a situation is to ask legal professionals to properly write the agreement.

A good way to protect your intellectual property is by properly vetting investors to make sure they don't have investments in companies that operate in the same markets as you. In situations like that, investors might be tempted to use the newly-acquired information to help other companies in their portfolio.

Another thing to be concerned about as a company founder is for a potential investor to share valuable information due to negligence. Documents sent online can easily be shared and forwarded many times over, so a good idea might be to present all important documents in person rather than on the internet.

However, before the owners of newly-founded companies need to worry about an investor misusing their good ideas, they first must worry about actually convincing an investor to listen to their pitch. Getting potential investors to spend their valuable time listening to you is a big enough challenge, and insisting on a non-disclosure agreement only makes things harder for the founder.

If you need help with a non disclosure agreement for investors, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.