Why I don’t sign NDAs

An entrepreneur started a meeting with me a few days ago by asking me to sign a non-disclosure agreement.  I politely declined and thought I’d back that up with a post on the subject (I recall reading a few other VC blogger’s views on NDAs in past years – there’s certainly no lack of thought on the subject, although it does seem to consistently come up every year).

VC’s, as a general rule, won’t sign NDAs. No – we’re not trying to steal ideas from entrepreneurs or pass confidential information along.  We’re just not in a position to review, negotiate and keep track of literally thousands of NDAs that would result if we started signing them on a regular basis.  Here are a few specifics from my point of view:

  • VC’s have little but their reputation.  I can think of few industries where individual reputation plays such a large and transparent role as it does in venture capital.  As a VC, I have little more to trade on than the reputation I’ve built up with entrepreneurs, my investors, other VC’s, etc.  Destroying this by sharing confidential information would just be plain stupid.

  • I can’t manage that many NDAs.  It’s hard to imagine the challenge of managing a few thousand or a few tens of thousand of NDAs if we started signing them for every company meeting or business plan that we received.  Even if I put them all on my own form (so that they were in theory all uniform in their requirements) it would be impossible to keep track of what information was presented and for what purpose. 

  • I meet with competing companies. In the course of a year I see hundreds of business plans and take meetings with maybe 100 companies.  In some cases these companies have similar ideas for products, are in similar markets or occasionally are direct competitors with one another.  While I don’t trade information across companies, it could appear that way if I’ve met with two competitors or if one of the companies I’ve met with changes direction and starts to look like another company I met with at.  I’d hate to get caught in the middle of a legal mess, exacerbated because I had NDAs in place with both companies.

  • I don’t know who my partners are meeting with.  At Foundry, we tend to take a team approach to looking at deals and we have pretty advanced systems for tracking what deals we’re looking closely at.  That said, I don’t know every company that my partners have reviewed a business plan for or have taken a meeting with.  Not only can I not manage that many NDA’s from bullet 2, but as a firm, we can’t manage the added complexity of who has seen what from what company in what context.

  • WD Murray

    Well said Mr.Levine.

    This sounds reasonable enough…Just Saying: ” NO to NDA”!

    My question is: approx what % of your deals are initiated with pre-patented ideas?

    Thank you, WD

    • sethlevine

      That’s a good question, WD. About ¼ of the companies we invest in at Foundry are seed stage and for the most part haven’t filed any patents. A reasonable portion of our Series A investments (still very early) likely haven’t thought about patents yet either. So in total maybe 50% haven’t filed a provisional or anything similar. All that said, there’s almost no risk to an entrepreneur that a reputable VC is going to steal their idea (pre or post patent – a patent won’t give most entrepreneurs much protection from that kind of thing in any case). Like I say in the post, it’s not about the legality of it, it’s the practical fact that doing so would be extremely bad for business. VCs ride on little more than their reputation… Thanks for the comment.  seth

  • Thanks for the VC perspective on this. Even among entrepreneurs and potential co-founders/partners, I personally think NDAs should be avoided, in general – particularly “first date” NDAs. For the entrepreneur, there are many drawbacks, and very few benefits. Issues include ways your future opportunities become more limited, your liabilities become unlimited and it goes against the principle of free flow and exchange of human ideas. http://orbinary.com/blog/2010/07/the-first-date-nda-just-say-no/n

  • Lboguy

    Too bad buyouts don’t work this way!