Startup founders very often find themselves in a dilemma, when discussing their idea or solution in early stages. What if someone copies my idea or plans? How do I protect the sensitive information and still interest customers and investors for my plans. We will share some thoughts and market practises in this blog post, that also marks the availability of a Capital Waters standard for an NDA online.
To cut it short (for people that have little time to read), these two main rules are very important when working with NDA’s: First, if you cannot share the essence of what you do or intend to do, up to the level that you can convince customers, partners and investors, there is no use protecting whatever you have got. Second, protect only what you cannot afford to lose, like information that is going to be used in a patent application.
NDA’s can be used for investors, partners and customers. Use NDA’s only when working with parties that need to know very much about your solution or company. This usually counts for investors, some of the partnerships and customers only in the B2B segment, and then only when selling non-standard products.
Here is a brief timeline with the use of NDA’s in the investment process, which works similar for working with customers and partners.
- Customers, B2C no NDA’s, B2B (enterprise), as with investors (were you read investors below, please also read enterprise customers (non-standard products)
- Teaser for investors/B2B customers, no NDA
- Investor presentation: only an NDA if you have value to protect, like a patent to be applied for Due diligence: always NDA (might be included as confidentiality clause in the term sheet/LOI)
- Final agreement: a confidentiality clause will always be a part of this, as you can also find in our documents here.
Basically, you need to be very careful when using NDA’s or confidentiality agreements. It could hamper your ability to do business or get funded. Investors are usually very reluctant to sign NDA’s in a very early stage of an investment process. In most cases it is also not needed to consider your customer focus, product and business model as sensitive. It is not about the know what but all about the know-how and know-why from a customer perspective.
When you are not sharing information, make sure that you make it credible to the counterparties that you are dealing with that you actually can do it and that it is not a scam. Be able to show credentials, similar projects or a tip of the iceberg. Even the combined resumes of your team and references might be ways of confirming your potential if you are incapable or unwilling to show it directly.
And should you use an NDA or confidentiality agreement, be aware of its limited protection. How will you prove that an investor or other counterparty has used your information to make the decision to work with your competitor. And as startups, you have limited legal resources to enforce a penalty to a breach, making you quite vulnerable. From that perspective, it is more a gentleman’s agreement than anything else.
But as everything has it’s time and place, an NDA always comes along sooner or later. Make sure to download your free copy of our NDA template here.
The NDA published on Capital Waters is what we consider market practice when negotiating a deal with an investor. A two year term not to use the information, free to share with advisors, no penalty on a breach, etc. Some of you, being a startup, might think this NDA is soft and very investor-friendly. We don’t agree. Imagine you were on the other side, getting a lot of information from various startups all in more or less the same area of business under very strict covenants. You wouldn’t be able to have a normal conversation with someone without putting your head on a block! Of course there are exceptions, but in most cases this NDA should be sufficient to protect your business interests and at the same time being acceptable to investors.
We hope that many startups and investors will benefit from the freely available documents on www.capitalwaters.nl. We keep on working on providing new and improved documents to reduce time and costs of setting up a business and making investments in early stage companies. Please feel free to contact us with any enquiry or feedback via firstname.lastname@example.org.
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