I asked a fellow lawyer, an investor and a startup founder “Should a founder ask an investor to sign an NDA when pitching for the first time?” Predictably, here are the answers I got:
Startup Founder: “Yes, No, Maybe, I do not know, what do you think?”
So here is what I think.
As a trained lawyer, my default answer is “Absolutely! Yes”. However, as a startup lawyer I deal with a different reality and my answer cannot be a simple yes or no. No absolutes here.
There are numerous quotes about the uselessness of an idea until executed –-
Ideas are a-dime a dozen. People who implement them are priceless – Mary Kay Ash
Ideas are worthless, Execution is everything – Scott Adams.
…the idea is really 1% of the value. The value is in the execution” – Chris Schultz
And my personal favourite:
Ideas are funny things; they don’t work unless you do – Lou Holtz.
Writing this article, I thought to myself, “if ideas are so useless, why then, the hullabaloo about signing an NDA? After all, you only protect that which has value. The truth is ideas are not actually useless. Execution however has the potential of creating infinite value from an idea; as such to my mind ideas are also deserving of some form of protection. The timing of this protection however becomes an integral decision to make when a founder is pitching to a potential investor.
Whilst a founder has a lofty estimate of the value of his/her idea, an investor, especially an active one would probably come across the same idea several times from different people. Signing an NDA with a founder who (s)he has not decided (s)he would invest in, makes the investor susceptible to law suits if he goes ahead to invest in a similar idea that has been pitched by another founder.
What then is the balance for a founder who desperately wants to protect his/her idea but needs to raise funds?
Know your investor – Do not go sharing your idea with every rich Tope, Dozie and Hassan. Any investor worth his/her salt would not steal your idea even if (s)he likes your idea but chooses not to invest in you.
Learn to Pitch without revealing your trade secrets – It is okay to say the “what” without revealing the “how” and “why”. An investor who is interested in you can make a decision based on the “what” of your pitch. At the point of when you need to reveal the “how” and “why”, please let the investor sign an NDA! A fair investor would have no objections at this point, in fact (s)he would probably want a mutual NDA at this point too as (s)he would also likely be revealing information that needs protecting.
Send an Email – If you feel the idea you shared was so awesome and you need documentary evidence that you shared the idea so the investor does not “steal” it, send an email! Yes, an email. After meeting an investor, send a thank you email and in the email document your pitch (in one sentence PLEASE) and use language that would elicit a form of response from the Investor. For example –
Dear Soon-To-Steal-My-Idea Investor,
It was a pleasure meeting you yesterday. Thank you for taking time out to listen to my “idea that is oh so awesome that no one else has ever conceived it”.
Even though at this time, you are not desirous of investing in my “oh so awesome idea”, I look forward to the possibility of engaging or working with you in another regard. If you do not mind, would it be okay for me to reach out to you by email if I need your advice or mentorship at some other time?
Awesome Founder with unique ideas
If the investor responds, lucky you! You have documentary evidence that can be admitted in court, should you decide to sue the investor if he invests in a similar idea you feel he may have stolen from you. If you do decide to go to court however, there is an onus on the plaintiff (the person who is suing) to show the court that not only was his idea stolen but that he has suffered damages (a loss) as a result of the idea that was stolen. It is based on the loss suffered that court can then award damages (compensation).
In conclusion, my advice to any founder is that you do not have to sign an NDA when pitching to an investor for the first time, however your due diligence thoroughly so you are not sharing your ideas with people who can do you harm. At the point when you do need to reveal additional information, especially if they are trade secrets (the “hows” and “whys”), please by every means, do sign an NDA.
Articles do no not constitute legal advice, neither has a lawyer-client relationship been created by engagement in the comment section. If you require professional legal advice, kindly contact your legal adviser.