Put yourself in the position of a VC: You may receive dozens or even hundreds of business plan submissions every month. Just keeping up with the volume of submissions is difficult. Now consider what it would be like to have to enter into an NDA with every person who submitted a business idea. Just reviewing and negotiating these contracts would take longer than all the other aspects of your business put together!
Beyond time constraints, there is another much more important reason that VCs don’t like to sign NDAs. Signing an NDA with one person or company can limit the VC’s ability to make investments in that sector.
Again, let’s pretend you are a venture capitalist and someone comes to you with an idea for a novel way to distribute movies over the Internet. You sign an NDA, and they make their pitch. The idea is intriguing, but you cannot come to terms on how to structure the deal.
Two weeks go by and someone else submits an idea for a different Web movie-distribution technology. The product is solid and you agree to terms. Development begins, and the first party finds out about your new venture. Because it was similar to the idea they pitched, they accuse you of breaching the NDA you signed. Even though you never disclosed the first company’s plans and ideas, you must now spend time and money defending yourself against the accusation and a possible lawsuit.
These are the main reasons VCs will refuse to sign your NDA. In fact, even asking a venture capitalist to sign one can be considered a rookie mistake. The usual response to this request is a polite no to your face, but don’t be surprised if your submission finds its way to the “no” pile — or the trash.
Instead of relying on an NDA to protect your company’s proprietary information, focus on what you disclose and when you disclose it. Remember, you control the flow of information. If you are worried about disclosure, disclose as little confidential information as possible while still making a compelling pitch.
There are situations where a VC will sign an NDA, but this is generally after you’ve piqued the VC’s interest at an initial meeting. At that point it may be appropriate to request an appropriate NDA as you disclose more sensitive and confidential information at subsequent meetings.