Why An NDA Is Important For Startup Before They Pitch To Investors?

As a former VC, I have spoken to hundreds of entrepreneurs and startups. The most frequent question I received is a concern on how to protect the confidential information in the pitch.

To have a Non-Disclosure Agreement (NDA) will protect your intellectual property and will set a liability to a receiver.

But why is it important and how to protect your intellectual property?

First of all, a non-disclosure agreement (NDA) is legally binding that establishes a confidential relationship between the owner and the receiver of the documents. The parties are signing an agreement to agree that sensitive information they may obtain will not be made available to others. When you have an NDA, you are keeping plans secret and if an NDA is breached by one party, the other party may seek court action to prevent any further disclosures and may sue the offending party for monetary damages. How much you can sue a party depends on the value of the damages.

FAQs

A: What if an investor doesn’t want to have an NDA prior to the discussion?

A1: An investor will claim anything to his or her convenience so be aware of investors who do not respect your requirements.

A2: Usually, those who don’t have an NDA that’s because the status of their business is in early-stage with no proof of financial success [yet]. Hence, some startups don’t require liability at risk. However, if you honestly believe that your pitch has a confidential strategy that you don’t want to disclose with anyone outside your company, I suggest that you require an NDA.

B: Can I sue someone for sharing my information?

B1: Subject to the disclose information, if the information is known to be false by the person who spoke it, and defamatory (harmful to you and to your brand), you may be able to sue for damages.

B2: You may be able to sue an offending party if proven of disclosure of trade secrets. A trade secret owner can enforce rights against someone who steals confidential information such information on technical codes, product building, strategies, etc by asking a court to issue an order (an injunction) preventing further disclosure or use of the secrets.

C: Can I use a standard NDA?

C1: Yes, anyone can use a standard NDA template as it is used as a standard legally binding contract between parties.

C2: However, if you have more confidential information to protect and require strict protection of your data and trade secrets, to hire the service of a lawyer will help you. A valid and completely binding NDA will be drafted by a licensed attorney verses in contractual agreements.

D: Do lawyers sign NDAs?

D1: There is a legal duty not to disclose confidential information and an NDA is unnecessary, and attorneys are advised by legal ethics experts not to sign them. Most lawyers will only draft an NDA but will not sign on behalf of their client. In the state of California, for example, an attorney is required “to maintain inviolate the confidence, and at every peril to himself or herself to preserve the secrets of his or her client.” (Cal. Bus & Prof. Code Section 6068(e)I1) and may “not revel [confidential] information without the informed consent of the client.” (Cal. Rules of Prof. Conduct Rule 3-100).

E: What if the investor is not willing to sign an NDA and such won’t allow me to pitch?

E1: Then find other investors that will respect the confidentiality of your business. If an investor doesn’t respect the confidentiality of your business, you can rest assured he or she will not take any liability for disclosure of your information with a third party without your consent. And such your business’s strategy and trade secrets will be at risk.

F. How much does it cost to draft an NDA?

F1. Depending on the complexity of what you need to protect in your business and the number of parties involved in your business and/or in trade secrets. Drafting an NDA typically costs from $150-$1,500 in Singapore. If you hire an attorney working for a legal firm, you will be billed $600-$1,000/per hour or a fix rate of $3,000/day.

If you are a startup, I suggest using a standard NDA template to save money. If you have a lawyer friend that can help you, ask him or her favour.

Thank you for reading!