First-time entrepreneurs sometimes ask VCs to sign NDAs (Non-Disclosure Agreements). They do this because they are worried that their intellectual property will not be protected without a legal agreement in place.

To the surprise of these individuals, most VCs do not sign NDAs. However, in my opinion that doesn't mean that the entrepreneur is entirely unprotected.

While there are always exceptions, most VCs follow an informal code of ethics when it comes to intellectual property. Most VCs follow this code for a few reasons. First, they protect people's IP because it's the right thing to do. Second, they have a market-driven incentive to protect intellectual property, as a failure to do so would create a professional risk. A reputation of betraying this code would dissuade entrepreneurs from bringing opportunities to them, preventing them from being good at their job.

In addition to these reasons, VCs can't afford to invest the time or money in having lawyers evaluate NDAs for every company that the review.  VCs typically review thousands of business plans a year - if they had to pay lawyers to evaluate thousands of NDAs and spend time reading thousands of NDAs they wouldn't get much else done.  Ultimately this would create prohibitive cost and time requirements.

Furthermore, there are frequently numerous startups trying to solve the same problem.  VCs may meet with many of them and it takes VCs awhile to figure out which company they want to back. If they had to sign NDAs with each company before hearing their pitch, there would inevitably be companies taking action against them when they join the board of one of the players (even though they still follow the code of ethics).

Based on that, it's generally not a good idea to ask a VC to sign an NDA, as it will make you look naive. If you are not comfortable with discussing your business with VCs without a legal document in place, then it may make sense for you to look for angel investors that will sign an NDA.

In my opinion, the best way to protect yourself is to make sure that you are pitching to VCs that are not on the board of a competitive company. Beyond that, VCs are generally ethical professionals and are, in my opinion, a safe group to speak with.

Comments

[Michael Riley]

Sorry but I disagree completely.

Most VC's I know would sell their own grandmother for a couple of bucks. Relying on their "informal code of ethics" is naive in the extreme.

[Brad Bartilson]

When a VC is seriously considering the investment they will sign an NDA (my experience). As a point of reference for others: when there is a hot investment area, VCs will make multiple investment in the same, exact area (funding competitors). In this situation personally, I was uncomfortable sharing when the VC had already made investments in competitors. I shared non-confidential information, however, this seemed inadequate for them. When they wanted to get into the technology details, without signing an NDA, I felt it was inappropriate.

[Imran]

I have been through process several times and its true that VCs do not sign NDAs. As an entreprenuer I am totally fine with it. I agree that generally VCs will uphold some level of ethics (although I also know that some do sell their soul!). However, I dont think VCs just invest in ideas. To be candid, ideas are a dime a dozen. How many totally unique ideas are the ones that really win. Its a combination of idea, team, market situation that makes the difference.
Also, unless its a very early stage VC, one would assume that the start-up already has some IP that they have when they are seeking funding.

[anonymous for a reason]

It is my experience that a VC will not sign an NDA for a business plan (BP). This makes a lot of sense for the VC. For the most part, a VC already will have been exposed to the ideas in your BP from other BPs and industry buzz. If they were to sign an NDA as a precondition to looking at your BP, they would open themselves up to (likely baseless) suits for breaching the NDA when they invest in a competitor who, independently, has conceived of a lot of the things in your BP.

You can protect yourself in a number of ways:
1. File patents for any IP. No reputable VC will advise their portfolio companies to violate your patents.
2. Do not send your BP to a VC who is already invested in a competitor. VCs may make multiple investments in the same area, but it would be unusual for them to invest in directly competitive companies. If you violate this rule, assume you are sending your BP to your competitor. As the CEO of a venture-backed company, I had one VC on my board who would send me the BPs of competitors ostensibly for my review and funding advice. I found this to be unethical and never read past the point where I determined a company to be a competitor. I told the VC I did not want to see the BPs of competitors and he stopped sending them to me. I presume that VC exposed me to ideas from competitors when we talked about markets and strategy, although there was no way I could confirm that.
3. Simply do not put detailed confidential information in your business plan. You should be able to pique a VCs interest without such details -- if not, then I wish you good luck convincing your potential customers that your company has a good product without similar revelations. As the CTO of a venture-backed company, I received several BPs from our backers with the request to give them a technical sniff test. In that position, I did not run across any competitors BPs, but think about it. Into whose hands are your BPs being delivered for review and to what code of ethics do they adhere?