It’s not a rumor: Many VCs and other investors will not sign NDAs during initial discussions. The challenge for founders, then, is to get them to that second discussion when they are willing to take more interest in you and are willing to sign that NDA.
Should you be worried about putting your IP at risk? Probably not. Think about it from the investor’s point of view.
Early-stage investors are usually talking to hundreds of companies every year and might invest in 1-2 of them. Signing NDAs with everyone who comes through the door would be incredibly burdensome, especially since in early meetings they’re really more concerned about the strategic thinking of the individuals who compose the core team. How they thought through their business strategy, how they’re going to go about positioning themselves in the market, etc. They’re not interested in all the details on your technology yet.
The next step is building a successful business together, and once you start the process of negotiating a term sheet that’s when you start to have deeper conversations around your IP as part of the investor’s due diligence. And that’s when it makes sense to sign an NDA to protect you both.
On caveat to this is for entrepreneurs who are spinning companies out of universities or national labs. Often, those types of technical founders have licensing agreements from prior work and IP that represents the foundational work of the company. During due diligence with those types of companies investors will really need to understand the licensing terms that they are under with the university or the lab and sometimes those can be problematic. Maybe the license imposes royalties or other market limitations on the IP, or maybe it limits how it can be monetized. That can be a hurdle that investors will want to know about early on.
But usually most early-stage investors are more focused on the founders and how they are approaching the business from a personal standpoint. Are they smart? Are they answering questions in an intelligent way? Do they have a good strategy for growth, and do they appear to be cohesive in their approach? That’s what those initial meetings are all about.
The challenge for founders is to be able to talk about the product in a way that is enticing but does not reveal everything about it. It helps to have a non-confidential pitch deck where you are comfortable revealing as much as you think needs to be revealed but keeps that secret sauce under wraps. That way, you can say “here’s my product, here’s my market, here are all of the ways that we’ll be able to make money so that you’ll get a return on investment.”
Yes, you have your own trade secrets that make it all work, and that’s what you’ll eventually want to file for patent protection, but there are ways to talk about that part without giving away the farm. For example, give them a taste: “Here are the ways in which we are leveraging our trade secret in order to get results that you won’t find anywhere else. Don’t you want to learn more?”