To disclose, or not to disclose: Striking the right balance when making a case for your business

As promised in Navigating The Catch-22: Successfully Fundraising For Your Business, this segment discusses, in detail, the nuts and bolts of confidentiality agreements. Also referred to as Non-disclosure Agreement (NDA), the NDA  keeps certain aspects of what an entrepreneur will discuss or disclose with a potential investor a secret.

While an NDA is an important document that helps protect your new venture’s confidential information, entrepreneurs should endeavour to strike the right balance between protecting their business secrets and sharing relevant information with potential investors to attract capital or other resources.

1. Timing is everything: Relationships come first

Indeed, the know-hows of your new venture might necessitate the execution of a NDA. However, this does not mean that you should walk into a potential investor’s office for the first time offering a NDA as a substitute for a handshake. This singular act may, in fact, be counterproductive as it may scare away savvy investors! The use of the words “scare away” is intentional. Indeed, this choice of words begs the question, “Why would a potential investor be reluctant to sign an NDA, if they do not intend to breach the agreement?” A few answers are listed below:

  • Most potential investors sit on numerous pitch competition boards. They encounter numerous entrepreneurs in their professional lives and are often asked to sign NDAs. Consequently, your NDA may be number 500 on the request list. As such, a potential investor’s reluctance to sign your NDA may not be because they intend to disclose your trade secrets, rather, it may be due to the practicality of keeping track of thousands of NDAs that they receive.
  • From a practical standpoint, it gets really challenging to track thousands of NDAs especially where entrepreneurs submit pitch decks with similar ideas.
  • Investors are not only attracted to an idea but to other factors such as your team, track record, probability of success etc.
  • Given that NDAs are important legal documents, investors will often want their lawyers to review these documents before they sign. This costs time and money—two things that have huge opportunity costs for an investor.

Notwithstanding, if you are concerned about a potential investor’s ability to protect your confidential information, you should vet them. This can be easily done by utilizing your networks to find out more about a potential investor. If you are not satisfied with the results of your due diligence, then consider safeguarding your proprietary information.

You have to strike the right balance between keeping your business know-hows a secret and attracting investors. The free flow of ideas is an important factor in further developing your product and raising capital. However, you do not need to disclose every minute detail of your business to an investor if you do not feel comfortable doing so.

2. Practical consideration when reviewing an NDA

When you get to the NDA stage, it is imperative that you carefully review the NDA, negotiate the terms, and participate in the drafting process. If there are provisions you do not understand in the NDA, don’t feel embarrassed asking about the intent of that provision. Below are a few items you should consider when negotiating your NDA:

  • Ensure that the party that signs the NDA has the authority to do so. Check to make sure that individual is an authorized officer of the company.
  • Ensure that the NDA details what the word “confidentiality” means. If the definition is too broad and contains everything under the sun, you might get a lot of push back from your potential investors. So, be practical about the scope of the definition!
  • In the same light, your NDA should clearly explain what doesn’t constitute confidential information. Remember, exceptions are equally as important as inclusions.
  • The NDA should also detail the manner of the disclosure that will be kept confidential. For example, will both parties treat oral disclosures as confidential information?
  • It is also important that you carefully think through your negotiation strategy during the NDA drafting phase and that you negotiate from a practical perspective. Spending too little negotiating a NDA might create an impression that you are not a savvy businesswoman. This perception may hurt your negotiating power with your potential business partner in the long run. On the other hand, overly negotiating a NDA might make you appear as one who might be difficult to work with. It is essential that you find the right middle ground. As a general rule of thumb, entrepreneurs should not negotiate past three drafts. More drafts may be required for an extremely complex project.
  • Treat the NDA negotiations as a pre-investment negotiation interview. During this stage, your potential investors are just getting to know you. This is your opportunity to show them that you are savvy businesswomen with excellent negotiation skills.
  • During the drafting phase, be cognizant of who will have access to the confidential information. Will all employees have access to the information? What third parties will have access to the information? All these considerations are important as they let you know the individuals that will be privileged to the information you have provided.
  • Your NDA should also list each party’s responsibilities or burdens.
  • Ensure that the NDA contains remedies that are reasonable.
  • Most importantly, research your potential investors or business partners to ensure that the individual or firm is a reputable and fair player in the market.

To summarize, it is imperative that you carefully consider the timing of requesting an NDA. When it becomes necessary to execute a NDA, carefully negotiate your NDA and ensure that you understand every word on the agreement before you sign on those dotted lines.

In the next segment, we will discuss the art of successful negotiation. If you would like insights on a particular topic, write to us! We are listening.

 

Navigating the catch-22: Successfully fundraising for your business

money

Once you have successfully registered your new venture and executed your partnership agreements, the next phase is getting your new venture up and running. For some, this might not be an issue as you probably have sufficient savings and contributions from family and friends to commence this new venture.  For others, the fundraising process begins!

Fundraising is not a task for the faint hearted, as it requires a high dose of patience, perseverance, tolerance, and politeness. However, while the fundraising process might require a heightened tolerance for frustration, it is imperative that you think beyond the fundraising process.

For example, you should not accept a potential investor’s offer simply because that investor has agreed to give you all the funds you need to scale your new venture without thinking through the possible impact that potential investor may have on your new venture or ownership structure. This segment details some important points that you should consider during your fundraising process.

1. Don’t let the cat out of the bag prematurely

During the fundraising process potential investors will ask you to share information about your new venture so that they can make an informed decision on whether or not they can provide you with the funds you require. Indeed, you have to furnish them with some of the information they seek.

Nonetheless, it is important you strike the right balance between your fundraising needs and safeguarding your new venture’s confidential information. You have worked hard to develop your new venture and create a niche for yourself, as such, while you may be in desperate need to fundraise, you should also think beyond the fundraising phase by safeguarding your new confidential information.  

Moreover, of what use will the funds raised be if at the end of the fundraising process your new venture’s secrets has been disclosed to potential competitors who are now offering the same exact product you wanted to offer?  You owe it to yourself and your new venture to protect your new ventures’ confidential information such as the “know-hows” of your new venture, the trade secrets, and all other information that makes your new venture unique. Thus, before you commence deep discussions about your new venture with a prospective investor, it is imperative that you sign a non-disclosure agreement (even if that prospective investor is a friend!).  

Your non-disclosure agreement should: (i) be executed by all parties that you want to be bound by the agreement, (ii) identify the right legal entities and/or individuals that are intended to be bound while also indicating that representatives and affiliates will be bound, (iii) provide remedy in the event of breach, (iv) include a definition of what constitutes confidential information, (v) address the term of the non-disclosure agreement and what happens at the end of the term, i.e. whether the investor has to return the confidential information to you or destroy it.

Indeed, executing a robust non-disclosure agreement with an investor does not prevent such investor from breaching the agreement. As such, protect your new venture by taking the extra step of researching each potential investor to ensure that such investor is a respected and professional player in the market.

2. Think carefully, pick selectively

You must carefully select an investor. Yes, the order of the previous sentence is intentional! In a world where financing is not infinite, entrepreneurs often feel very lucky to find an investor who is willing to invest in their business. While the feeling of immerse gratitude is not misplaced, it is imperative that entrepreneurs also carefully select their investor. Do your due diligence on your potential investors! Remember, an investor’s investment is never “free”! It often comes with numerous strings attached.

Oftentimes, these strings are good strings in that they bring value to the new venture. For example, the investor may require you to adopt environmental, social, and governance policies, or anti-money laundering policies. Such requirements are valuable additions as such changes could translate to higher returns for your new venture.

As such, before signing those dotted lines, entrepreneurs should consider the investor’s track record and reputation in the industry, the investor’s proposed economic rights and governance rights and whether such economic rights are proportional to the investor’s proposed investment, the factors the investor considered in arriving at its valuation.

Think of your investors as long-time business partners—you may be married to them for a long time. So, think carefully and pick selectively!

3. Don’t jump to the finish line

So you are extremely excited that you have selected the right potential investor and strongly believe that the potential investor will invest in your new venture within a few months. Indeed, you trust your intuition on this because your intuition always leads you to the right path. As such, you believe that the next logical step is to email all your new venture agreements (shareholders’ agreements, share purchase agreements etc.) to the potential investor while they conduct their final review process so as to streamline the process.  Please Don’t!

Wait until you hear from your potential investor that they have decided to strike out “potential” from the words “potential investors.” There is no point jumping to the finish line and investing resources by drafting agreements that may not be eventually utilized. Moreover, your investors might have a preference for providing the definitive agreements.

To summarize, the fundraising process is not a task for the faint-hearted. While you may have an urgent need for working capital, you should also ensure that you safeguard your new venture throughout the process. The success of your new venture also rests on your ability to protect your new venture’s confidential information.

In the next segment, we will discuss the non-disclosure agreement in detail. If you would like insights on a particular topic, write to us! We are listening.