This article was written based on my experience working at a VC, so I have described the details least known by founders when the topic of NDAs pop up.
I still do work with startups as a scout for LvlUp Ventures, so if you are raising, feel free to book a call with me here. If you know someone who’s raising, feel free to share it with them.
Founders often find non-disclosure agreements to be quite confusing and tricky to navigate. Due to their lack of understanding of who should send an NDA, who to send an NDA to and when to send an NDA, they tend to send it at the wrong juncture of their fundraising process. When I was at a venture capital firm, we would usually start off with screening the basic elements pertaining a startup. This includes the founders profile, the startup’s business mode, industry trends, etc.
No sensitive information will be requested at this point in time. So, avoid sending out NDAs at the very earliest stage of fundraising because VCs want to know more about the person building the startup and the startup itself. Venture capital firms receive many deals, so avoid sending NDAs too early to avoid jeopardising the trust you are about to build with a venture capital firm.
Before jumping into the exciting part of the article, I think it’s best to clarify what an NDA is. So, an NDA is a legal binding contract that retains confidential information secret between two parties. In this case, it can be you (the founder) and venture capital firms or angel investors or corporations and many more. There are different types of NDAs out there but I will not be covering it in this article. A quick google search or an LLM can help you with that.
Now, you should have a rough idea of what an NDA is and when to not send one.
Usually, a founder or a senior executive will be sending out an NDA but there are two personas of people that should truly consider sending out an NDA. They are those with subject matter expertise and a repeat founder. They are best positioned to send one especially at the earliest stages.
Who should send an NDA?
If you are someone with deep subject matter expertise, you should already know this but if you aren’t, you should consider sending one. People with subject matter expertise would have acquired their expertise through experience while the rest of the experts would have gained their expertise through years of research. For example, if you had spent years researching on a treatment for a certain type of cancer, yes, consider an NDA because you have the expertise on this domain, and you definitely have access to proprietary information through your research.
Repeat founders should also consider signing an NDA - of course, not at the very early stages. If you are a repeat founder, you definitely know this already. But, if you are here to know more about NDAs, repeat founders should consider an NDA because they have the proven experience, thus have the right to protect it.
Now, you should have a rough idea on who should send it other than the obvious individuals at the right time. But, what about who should you send an NDA to?
I will be covering the individuals not usually included in some guidelines.
We know you have to send NDAs to VCs, partners, contractors, freelancers, and so forth. These are the obvious individuals. But, there are some individuals or organisations that founders often omit sending an NDA to.
Who should you send an NDA to?
Angel Investors
Angel investors aren’t always investing full-time. They could be operators at other startups or founders themselves. They should be aware of protecting confidential information, but angel investors do not have the same institutional framework as venture capital firms do. They don’t have a governance framework to maintain a founder’s faith deal after deal. They are, however, still trustworthy, but considering an NDA when the conversation progresses would benefit you in the long run. It also just keeps you at ease as a founder.
Family Offices
Remember, family offices are usually set up by those who own/owned successful businesses. They may be interested in a competing company or industry so you may be exposed to data leakage risk when you share any data with them. That’s why the NDA serves as a risk management layer.
Who else or which type of entity do you think founders should be concerned of? Let me know in the comment section.
Now, you know who founders don’t usually consider sending an NDA to, and why these are the exact individuals or organisations you should consider sending an NDA to.
What about the timing? When should you as a founder send an NDA?
When to send an NDA?
You now know what happens at the earliest stages of screening, so scrap the NDA aspirations for now.
Also, remember the following.
Early on in screening, you must understand that you are also screening the venture capital firm. Ask yourself if you see yourself working with that venture capital firm for the next 10 years.
Once a venture capital firm proceeds beyond screening, the real diligence begins. They will start asking for financial statements, customer data (any LOI signed?), proprietary technology information, cap table details, and information that would actually hurt if it ends up elsewhere. This is when you know it’s serious, and an NDA starts becoming a risk management layer for your startup.
It also holds true when you disclose your actual source code or the un-patented mechanics behind your core technology, regardless of where the conversation is at. That detail is rarely required early on, but if a venture firm truly requires it to proceed, the conversation about confidentiality should take place at that point, not earlier.
So, what happens if you are a first time founder and just got asked to share sensitive information? Well, get the NDA signed.
This is by no means an exhaustive guide on how to approach NDA as a startup founder, but it should provide you with some information to navigate the conversation surrounding NDAs.
That’s it for today. See you in the next one!