Founders often face a conundrum when seeking investment for their start-up:
Should a start-up require prospective investors to sign a non-disclosure agreement (NDA) before receiving the pitch?
Many investors refuse to sign an NDA before hearing a pitch or looking at an investment opportunity. Why? An investor who signs NDAs with one start-up puts himself in harm’s way for a lawsuit if he invests in another similar start-up. Of course, the best method for protecting confidential information is not to disclose it; there’s simply no need to show up and spew your secret sauce during a pitch. Instead, founders should be able to state the “what” of the business without giving away the “how.” This being said, it doesn’t mean that start-ups should forgo NDAs. Rather, outside of prospective investor pitches, and outside of the discussion of the start-up idea, all disclosures of confidential information should only be done when necessary and only pursuant to a non-disclosure agreement drafted for the specific purpose of the disclosure.