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.