Asking For a NDA at the Wrong Time?

Lots of entrepreneurs feel the need to protect their business ideas and (what they feel are) their competitive advantages. As a result, whenever they go into meetings with people where they will have to discuss the details of their business, they feel it necessary to obtain a non-disclosure agreement beforehand. This often occurs in the context of meetings with investors, but it can also occur with other groups of professions such as attorneys (speaking from personal experience). The fact of the matter is that these entrepreneurs hell-bent on protecting their ideas are asking for NDAs at the wrong time and, frankly, can look a little amateurish for doing so. For example, there’s really no need to ask for a NDA from an attorney — attorneys are generally *required* by the ethical rules of their profession to keep the subject matter of discussions with clients confidential. An attorney isn’t interested in stealing a startup’s ideas, nor is an attorney willing to open themselves up to the risk of litigation in the event they end up working for a similar company. Absent a compelling reason, attorneys generally won’t sign NDAs because they are ultimately redundant, so please don’t ask us. Perhaps more importantly, it is largely becoming a faux paux to ask for a NDA prior to an initial meeting with an investor. Professional investors meet with dozens, hundreds, even sometimes thousands of entrepreneurs every year — some of these entrepreneurs’ business will be very similar to one another, and like attorneys, investors are not going to take the risk of litigation for a NDA violation by talking to someone with a substantially similar or identical business idea. And because investors may talk to numerous entrepreneurs, they have the luxury of refusing to speak with anyone who demands a NDA from the outset — there will be plenty more entrepreneurs who are happy to have an initial meeting without one. So when should you ask for a NDA? NDAs become useful when you actually have trade secrets to protect — these include formulas, software or other computer programs, product designs, or algorithms, and can also include business plans, supplier lists, customer lists, marketing plans, or finances. Trade secrets must not only be secret — that is, not publicly known or derivable from public information, but also provide value and/or competitive advantage to the trade secret holder *because* of their confidential nature. You can ask for a NDA when you begin disclosing the specifics of these types of information to an investor, which usually only occurs when a deal begins to seriously move forward. You don’t disclose the “secret sauce” of your business within the first couple of meetings with an investor, so there is little need for a NDA in the beginning. Once both sides begin to get serious about a deal, and once specifics start to be discloses, then might be the appropriate time to ask for a NDA.

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