If you’re a startup founder, find another way to protect your important secrets

When running a business was my full-time job, I signed a non-disclosure agreement nearly every day.

We had 2500 customers, mostly large enterprises. Almost every one required us to sign an NDA before telling us what they needed. I’ve signed at least a thousand NDAs.

In the end, pretty much every one of those customers needed exactly the same thing. We listened to their requirements, recommended the right model for them, and sent them a quote. The NDA was superfluous and irrelevant. We signed them anyway.

We agreed we wouldn’t divulge their secrets. We rarely learned any secrets worth divulging, and had no intention of divulging them anyway. We just wanted to sell products to them, and this was part of the process of becoming a trusted supplier to a big enterprise.

Now that I’m a venture investor, though, when asked by a startup founder to sign an NDA before pitching to our group, I have no choice but to say no.

How Venture Investors See NDAs

We’ve all heard the stories of the startup founder who pitches to a VC and gets rejected. A few months later, the VC invests in a competitor. When the founder checks the competitor’s website, she finds a product nearly identical to their own.

WTF!?! she thinks. The VC gave away her secrets to the company they invested in. She ought to sue. If there was an NDA in place, she could. And that would be a mess.

Let’s turn it around and look at it from the investor’s point of view.

My investment group specializes in startups innovating in chemistry and materials. Nearly every month, we hear a pitch for a startup developing battery-grade graphite from methane. We hear a pitch for a process to turn plastic waste into sustainable aviation fuel. And we hear a pitch for making seaweed into plastic.

We’re pitched on multiple ways to reduce fouling in water purification membranes, better ways of adding silicon into battery anodes, and overlapping solutions for better flow batteries.

Any investor focused on a particular sector will see a lot of overlap. Entrepreneurs see the same pressing problems and see the same opportunities to build solutions. Some are researchers in universities, some are scientists and engineers in industry, others are business people. They look into solutions to the same problem and come up with similar answers. Their pitch decks sometimes even use the exact same clipart and quote the same reports and statistics.

When we ask the founders how their their startups differ from the others, they often haven’t even heard of their competitors. That’s no surprise since most of the startups pitching us are still in development. Until they start generating significant revenue or land a big investment from a16z, they’re flying under the radar whether they intend to be in stealth mode or not.

We’re likely to invest in one of those startups, picking the one we think has the best chance of success. At that point, there will be an announcement.

If the other founders check, they’ll find a startup that looks remarkably like their own. The need will be the same. The technology will be similar. Some of the wording will be nearly identical. And a few founders who thought they had a unique solution will be sure we gave away their secrets.

If they talk to a lawyer, they’re likely to see a juicy pile of cash sitting in the bank and an insurance policy ripe for the picking. If there’s an NDA in place, it looks like an easy win. No reason not to threaten to sue us. Perhaps the insurance company will offer a few million dollars to make the problem go away. If not, they can file a suit and begin a discovery process, demanding access to our internal documentation.

Even if we win, the lawyers fees will cost us millions and the distraction will take us away from what we need to be doing. Most importantly, a lawsuit, no matter how frivolous, would mark us as people not to be trusted, which would kill our best deal flow.

So, simple answer. We don’t sign NDAs. Sorry.

But Sometimes (Rarely) We Do

The general rule is we don’t sign NDAs. But there are exceptions. Sometimes, though not often, we need to dig deeply. We need to discuss that secret sauce. We need to understand IP where you haven’t applied for patents yet. We need to review customer contracts.

In that case, we’ll figure out a workaround. It will have to be late in the diligence process, not at the beginning. We’ll designate a single person with expertise to check specific details.

That person will report back to the group with their findings. It won’t include your secret sauce because as a group we don’t want to know.

It’s a pain in the butt, so we don’t do it unless we’re already likely to invest. Often, the person designated to sign will be the deal lead, who will become the board member or board observer once the investment is complete. Board members, of course, are required to sign an NDA, as are employees, contractors, and advisors, since they have access to all the company’s secrets.

Asking for an NDA to Pitch is an Automatic Rejection

At the beginning you have to pitch to us, and we’re a pretty technical group. If you’re pitching us on a process to convert plastic waste to sustainable aviation fuel, we’re going to ask you how it works. We’re going to ask to see the techno-economic analysis and probe your basic assumptions on price and costs.

We’re going to ask you how you’re different from the dozen other startups that pitched us similar technology. And we’re going to ask about your customers and business plans.

If you ask us to sign an NDA, we’re going to say no. If you tell us you can’t answer those questions without an NDA, your application goes to the reject pile.

So you are going to have to trust us with basic information. We’re not going to give away your secrets to your competitors. But really, whether you succeed or fail has nothing to do with numbers in a spreadsheet or plans on a powerpoint presentation. It’s not about your business plan; it’s about your business execution.

If you do have a real secret sauce — a new process, an important technical discovery, or key customer relationships that can’t be disclosed, you can give us the outline. You can tell us the overview of what you’re planning to patent and what to keep as trade secrets. We don’t need to know the details. You can tell us the type of customers you’re in discussions with without giving us their names.

Because all we want is the outline. We don’t want to recreate your technology or build a competing business. What we need to know is know how you’ll succeed in a crowded field and what you’re doing different from everyone else.

So protect yourself by giving us the information we need to assess your business without giving away critical secrets. Just as we’re going to protect ourselves by not signing that NDA.