My background and experience as an attorney points towards the use of contracts to protect the business interests of my clients. That is why I always (and will always) say a contract is a small business owner’s best friend. So, if you told me that you were about to pitch your ideas to an investor, I would automatically implore you to have investors sign a non-disclosure agreement . After all, you have to protect your proprietary idea right? What would happen if the investor were to share your confidential information with another competitor?
After reading an article by Eilene Zimmerman, however, I have definitely decided to rethink my approach to this “no-brainer” issue . Did you know that it has now become almost uniform policy among Silicon Valley investors to NOT sign non-disclosure agreements (NDAs)? Some investors believe that as an entrepreneur, you should be willing to talk about your ideas with anyone who is willing to listen. Others believe it is simply a waste of time because, with NDAs, meetings are delayed by at least a week while lawyers review the contract Another factor is that some entrepreneurs like Ben Goodwin have come to realize that even if you have a signed NDA, it is difficult and expensive to enforce in the long run and as a small business owner, he simply does not have the have the legal and financial resources to expend on that.
So, does that mean NDAs are now extinct? As I said before, very few lawyers would agree with that statement. But, as an entrepreneur you have to be a bit of a risk taker right? So, if you got a chance to pitch an investor you may have to “roll the dice” and simply go in without an NDA. But, this is where Ms. Zimmerman’s article is genius! She got a group of experts to give you some tips about how to make this a calculated risk in your favor. Here is a summary:
- Ask Investors To Sign An NDA Only If You Have Something Legitimate To Protect: In so doing, find a way to structure your 20 minute pitch in a way that will not disclose any real proprietary information.
- Always Research Your Investors: If it is an unknown investor, get references. Though it is unlikely that reputable investors would steal your ideas, it doesn't hurt to make “sure an investor [does] not have potential conflicts or overlapping investments.”
- If Possible, Get Provisional Patent Protection: “If you’re far enough along that you've developed an app or a prototype, there is a big advantage to filing a provisional application”.
- Proceed Gradually: Essentially, you should give your investors only a bit of information at a time. For example, you first tell them about the benefits of the product without disclosing anything specific about how it works. As you go along, and you ensure it is a mutually beneficial fit, then you can disclose proprietary information a little at a time.
When I worked with large corporations, the use of contracts was a natural part of the business experience. Small business owners, however, fear that their business partner will be offended if they asked them to sign a contract. This article shows that there can be a happy compromise: you can get legal protection even in situations where a contract is simply not feasible.
