One time I was at a StarTech (incubator) event in Dallas (about 2002 timeframe). Some guy was working the room and he happened to come over to me and an investor from Houston, TX. We found out the guy was an entrepreneur and the investor asked him about his business. The first thing the guy said was that he needed the investor to sign an NDA before he could tell him. The entrepreneur even had one ready to sign in his hands. The investor turned (gave me this look that he was disgusted) and walked away. The poor guy was dumfounded. I turned to him and asked, “Do you make anti-gravity machines or a new medicine?” He said, “Oh, we have a new online DVD method.” We talked briefly, and I told him the below. Later, the investor told me how unimpressed he was about the entrepreneur. Unfortunately, I do not think that entrepreneur ever got a second chance with the Houston investor.
If you are pitching an investor for the first time, whether it is in a networking event or over coffee, DO NOT ask them to sign an NDA just to hear your opening lines. You are wasting their time and they will walk away. It happens a lot, and they do not need their time wasted. NDAs require reading, lawyers, approval, and time that the investor does not have. It could further cause them to be bound in a situation they cannot afford.
Investors need to know whether or not you are even pitching something in their market space. You can save them a lot of time by cutting to the chase. If it is not in their market space and you honored their time, they may give you a name to call. This will open the door to another investor. Instead of having to coldly call someone, you can now use an introduction and typically be warmly received. This is worth a lot!
When giving your pitch, just do not share any top secret information. They do not need it to make a decision whether to hear more.
After your pitch, if they are interested in having you give a presentation or a business plan, you may open the idea of an NDA. Simply ask, “Do you sign NDAs?” or, “What is your policy on NDAs?”. Half of them do the other half do not. Quite frankly, it is a moot point. If any investor gave away the secret sauce of some pitch she heard, then she would never get to hear another pitch. It is just bad form.
Would you require an NDA for an executive summary? Once again, an executive summary should not be giving out any secrets, so my answer is, “No.”
However, you, the entrepreneur, are still concerned. You do not know this person. Ask a few questions. Are they an investor? What have they invested in before? Get a business card. Look them up on the internet. Ask around. Do your research. You can quickly get a feel if the person is for real.
Investors who do not sign NDAs believe that they could get into trouble. Consider two things: investors hear similar ideas and focus in one or two disciplines. There is bound to be overlap. The difference is in the execution and the management team. However, if they sign an NDA and two people show up with slightly similar solutions, could the investor get in trouble if they pick one and not the other? Some people say it is possible, so it is best not to sign an NDA.
Remember, the entrepreneur is not just selling their idea, they are selling themselves. When you consider that, then an NDA is pointless. Until we have cloning machines these other companies just cannot duplicate the most important ingredient: the entrepreneur.
Wait until the business plan or better yet, the due diligence stage before you go the NDA route. At that point, the investor has made the decision to commit the time and resources. If they do not have a standard NDA then use one of your own.
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BTW, here is a standard disclaimer I will use whenever I discuss legal issues: This is business advice. I am not a lawyer, and do not use me as such. If you are looking for legal advice, then get a lawyer. If you want recommendations send me an email and I will point you to a few.
