Ask HN: A potential investor in my startup asked me to sign an NDA. Should I?

[kwiki]

On HN there is plenty of posts suggesting startuppers not to ask investors to sign NDAs... but what to do when the other thing happens, when is actually the investor who is asking you to sign a "mutual" NDA?

# background: - We've previously developed a prototype of a web technology which has attracted the attention of an investor

- In a meeting with the investor they have informed us of a market opportunity, a specific niche, where our product could be adapted

- Parts of the conversation had sensible information and they anticipated that we would have to sign an NDA, however, once they told us the information, there wasn't (almost) anything that isn't already public information. What they are putting on the table is a good intro to the specific niche: basically they have the client whom would buy our product

- we've analysed the market and the requirements and presented them with the final ideas of the project to develop, some where based on our technology, some where other business opportunities that the investor hadn't thought of and that we could build.

- now, once the presentation is done, they are asking to sign a "mutual" NDA (which "seems" mild enough), in order to keep talking about the rest of the project.

# My concerns: 1- there's many things about the investor that make it an undesirable partner (some parts are good, but most are bad)

2- Because the market opportunity is real, very very big, and largely untapped, we maybe still want to pursue it, and we still would like to honour the "introduction" to the opportunity done by the potential investor

3- We are afraid that this NDA could be wrongly leveraged in the future, if we end up pursuing and reaching this market.

Here's a pastebin of the generic mutual NDA http://pastebin.com/e2ZUU5qj

Any suggestions? I'm only afraid that this could be a liability for future developments of our product if it somehow overlaps the market opportunity they introduced us to. thanks

[marrington]

I'm a former lawyer and currently a VC. I really can't imagine a situation where I'd ask a company to sign an NDA in connection with a potential investment. If the information isn't confidential I'd just tell them. If it was it probably isn't mine to share (something we know from a portfolio company, for example).

So it's weird. It's also a red flag that the investor either doesn't really know what its doing, or that they're willing to share confidential information that they shouldn't, or that they are litigious and like to corner people via a NDA and apply leverage.

I'd walk away unless they are your only funding option. And if they are your only funding option you probably have issues with the startup or product that need to be addressed anyway.

[relaunched]

Listen to this advice. If you need the money, and it's your only source, you have to do what you have to do. This smells all kinds of wrong; and probably won't lead to money or money you'd want.

[neurotech1]

marrington is also the founder of TechCrunch, so he's likely heard about all the subsequent drama that usually follows.

Drama is something that startups need to avoid at all costs. Its an energy drain that isn't worth the money.

[kwiki]

Thank you all for your replies which I'll go on an study further. I'm honoured you all took the part of your busy schedule to suggest us what to do.

To clarify: They are not our only "investing option", but they are the first to introduce us to this market which we haven't considered before.

The "investor" is probably (we are not sure) going to ask to create a new-co, rather than investing money and getting shares of the company. They plan to access funds from other investors or grants.

To their excuse there actually was some information which understandably they wish to keep confidential, mainly names of peoples and charges and relationships. I don't want to give more clues about this as I wish to maintain that "hi-confidentiality" intact; which is why I also created this new account on HN

On one side, I think they want to ensure that we don't develop the project without them. I also think they fear there might be consequences (legal? political? of image? ) for them if we were to disclose their names, charges and some of the things they told us. But I'm not sure.

From a legal point of view I'm not sure if the NDA doesn't define who is the "disclosing" or "receiving" party, nor what were the contents that have been discussed, there might not be any basis to take legal action. Or is there?

[damonpace]

I'd walk away in any scenario. It smells of a trap or a bad investor.

[zaroth]

What confidential material is the investor providing you that you are afraid you might have to disclose in the future?

NDAs don't prevent you from disclosing your own confidential data. It prevents you from disclosing someone else's confidential data.

Basically the only thing you're looking for in the NDA is that only explicitly identified as confidential material is covered, for how long, and who can you tell.

It sounds like you might be confusing non-compete with NDA. An NDA can't prevent you from entering a market because a market is not confidential by definition.

[davismwfl]

I agree with this overall, one caveat I would add.

If the investor is introducing you to a portfolio company and disclosing data that you would not otherwise be able to obtain solely so you may enter into a developing market and/or sell to his/her other portfolio companies creating said market, it is potentially not as cut and dry. It is the place I would think only an attorney would be able to really answer with some authority.

Either way, I still stick to if you already feel the investor isn't a net positive then you should walk away. Just remember, you can be 100% in the right, still get sued and have to prove your way out of it. Do you have the cash to deal with that? Is the investors market that lucrative it would be worth a potential risk there? My guess is no.

[davismwfl]

there's many things about the investor that make it an undesirable partner

I think you already answered your own question. Never work with an investor unless you feel there is a solid and mutual relationship that is worth having. If you already have this feeling, politely say thanks but no thanks, otherwise you will be tied to them and likely have a rough parting later.

[USNetizen]

You need to ask a lawyer these types of things, not an online comment board.

In the Army, we had people we called "Barracks Lawyers" who thought they knew everything about the UCMJ (military law) but just ended up screwing a lot of good soldiers with their bad guidance. The moral of the story is that you are likely to get a lot of bad advice here from non-legal types, so be wary of that. YOU are taking all the risk with this decision, not the commenters on this post.

An hour with a qualified attorney now could potentially save you a year of bankrupting litigation later on. This is not the proper venue for seeking advice on a serious legal matter.

[kwiki]

Thank you for your concern. We are aware of that and fully share your perspective. I was just checking with the community if there was a precedent or if it can be common practice. Also, we might be on the look for an attorney and this could be a good place to start looking

[dctoedt]

Some observations about the generic NDA at the pastebin link --- I'm a lawyer, but not your lawyer, so don't rely on this as a substitute for legal advice; YMMV:

Section 1: The exclusion of information independently developed by the receiving party from the definition of confidential information can be tricky. A receiving party that wants to rely on that exclusion must gamble that a judge or jury will believe that the receiving party really did independently develop the information. That's not always a given.

Section 1: The list of exclusions at the end is missing another common exclusion, namely "disclosed to a third party by the disclosing party without confidentiality obligations comparable to those of this Agreement."

Section 2: The receiving party's right to disclose to third parties is really broad, much broader than some people would be comfortable with.

Section 2: If the receiving party discloses confidential information to a third party, and the third party misuses it, then the receiving party is liable for that misuse, even if the receiving party was innocent.

Section 3: This clause contains a "best efforts" requirement, which is vague and therefore potentially dangerous. (Self-cite: See the notes linked at http://www.commondraft.org/#BestEffortsDefn.)

Section 5: Be sure you're comfortable with the time periods for protected disclosure (two years) and protection of the disclosed confidential information (seven years).

Section 6: The return-or-destruction requirement can be a pain; technically it requires purging of emails, backups, etc. Consider a carve-out such as that in http://www.commondraft.org/#ConfInfoReturnRqmt: "Specimens of Confidential Information need not be returned or destroyed to the extent that they are not reasonably capable of being readily located and segregated without undue burden or expense — for example, Confidential Information contained in email correspondence or electronic back-up systems."

Section 10: Any litigation must be in the specified location; that could make things expensive for the party not in that location.

Further general information and commentary (another self-cite): http://www.oncontracts.com/confidential-information/

[kwiki]

Thanks for your detailed feedback. again, as I said up top, "investor" might not be the right term, I think they want to be "business partners" and create a new-co...I'm not sure, and sorry for the confusion

My concerns are mainly on Section 2 and 9. 2- Since the NDA never defines who is the disclosing or receiving party, nor what information has been given by one to the other, can they eventually pursue legal action and only then trying to demonstrate that it was them who provided the information (very difficult for them anyways)

9- This is basically saying that they or us can do whatever we want with that information, right? If this is the case, what would be the point of the NDA anyways?

[dctoedt]

> 9- This is basically saying that they or us can do whatever we want with that information, right?

That's not how I read the second sentence of section 9, which appears to be a conventional "don't blame us if you use this information and hurt yourself" clause.

That said, the exception at the end of the second sentence is not ideally worded.

[rilita]

Never sign such sweeping NDAs like this. I've had jobs try to get me to sign such and I won't sign them in a direct hire scenario either. As it is written if you talk about an idea with them and think of something good in the process, they could claim that you cannot leave them and pursue that idea on your own.

Also beware the "this negates all previous agreements". Anything they have said to you so far would be nullified by this agreement. This is, imo, a trick to try to escape from previous claims of what is acceptable.

[kzhahou]

> In a meeting with the investor they have informed us of a market opportunity, a specific niche, where our product could be adapted

So what? Anyone can come up with ideas of market opportunity.

> there's many things about the investor that make it an undesirable partner (some parts are good, but most are bad)

As others have said on this thread: trust your gut! It's simple, really.

> We are afraid that this NDA could be wrongly leveraged in the future, if we end up pursuing and reaching this market.

Exactly, because you already don't trust this investor. Your gut tells you they are wrong for your idea, and your gut is telling you they'll hurt you in the long run.

I think what's really going on is this "investor" doesn't really have solid leads (maybe just some emails, maybe just some casual contacts at some companies). They will bring no value to your idea. As they have no value, they go for old-fashioned contracts to attach themselves to whatever newbie entrepreneur will trust them.

Good luck! :-)

[ky3]

1- there's many things about the investor that make it an undesirable partner (some parts are good, but most are bad)

Trust your gut and politely turn them down. Continue to stay cordial with them.

[vonnik]

NDAs are very difficult to enforce, which makes them almost useless, and which indicates that the people who ask you to sign them don't know what they're doing.

If the investor is a large strategic, an NDA may be a simple formality required by their legal department, which you'll need to sign for them to discuss strategy with you.

If you don't trust someone, you shouldn't share with them information that requires an NDA. If, in addition to that, you fear that a signed agreement would be wrongly leveraged, then I would suggest not doing further business with them.

If you do sign the agreement, then you should try to minimize the legal costs you could incur due to a breach of the agreement. This will probably involve making arbitration the sole legal remedy. These clauses can be added to your contract:

http://pastebin.com/1YardRRu

[ChuckMcM]

NDAs are not valid for any information available publicly so if this is accurate : there wasn't (almost) anything that isn't already public information. then only the part covered in the 'almost' exception there is actually covered by the NDA (always useful to document the other sources of information though, should a lawyer come knocking).

That said, if you have a bad feeling about these guys then walk away. That is always solid advice.

[awinter-py]

Try and trade a verbal promise to be respectful of the sensitive information in exchange for a hint. A little more information can help you to turn this down with 0 regrets.

Also, bear in mind that large companies (not naming any names) will use NDAs for sharing future plans outside the firm. If they need to reveal a product launch to retain an important client, boom, client signs an NDA. So one likely read of this situation is that your investor has an inside track on partnering with a big web company on a feature launch. You'll be the flagship app on IBM Watson for long-haul trucking (or whatever).

Try and tack on clauses (1) limiting the term to 6 months, (2) preventing the NDA from encroaching on your documented existing plans for market growth (minor modification to clause 6).

I'm not a lawyer, this isn't legal advice.

[ig1]

Don't touch it.

Any decent investor would give the intro to the other company in any case if they thought there was mutual benefit to both parties.

I'm assuming the investor is not a regular tech investor given their behaviour, but if you really want the intro you can always say you'd be happy to take the intro after they've invested in you (i.e. at which point they'd be included in the upside anyway). But you might want to think twice about including an inexperienced (or possibly shady) investor in your round.

[vasundhar]

1.Investing is not just a monetary transaction. 2.Is he trying to evaluate, how despirate/aspiring you are by just asking you to sign NDA (verbally) 3. When you say, one of potential investors, you are not in dearth of investors, without knowing what is the market opportunity (percieved or real) its hard to say if you should go ahead. 4. I won't do it.

[jackChallis]

1) Get a good lawyer who is paid to have your back and understands your situation.

2) Listen to their professional advice.

There are times it makes sense to cut back. This is not one of them.

[mod]

Walk away.

Your bad feelings are 110% of that decision--the NDA and potential for its misuse are icing on that cake.

[andymoe]

No. If you have any reservations at all (and it looks like you do) tell them no.

[MCRed]

Background: 25+ years in startups, numerous financing rounds, more pitches than I could possibly remember

My perspective: Even the best investor- the one you're in love with that seems like a match made in heaven has a good chance of really hurting your company. In my experience the two causes of startup failure are bad decisions forced by investors, often involving forcing a co-founder out, or fights between the cofounders- often a result of an investor trying to force a bad decision on the company.

I would not take money from an investor who has identified "another client" with a specific niche, and this is even assuming they are desirable.

The reason: You're already going to know they are going to expect you to cater to their client and tailor your product just for that client.

Add onto that "many things that make it an undesirable partner".... walk away.

IF you're investable there are many choices. If this is your only choice- you'd be better focusing on what makes this your only choice and fixing that, than taking this money.

[anthonyskipper]

The advice here is terrible and the opposite of what it should be. I've seen tons of startups screw this up and wreck great opportunities. Yes, you need a lawyer to review the contract, but you should just sign it and move along if the lawyer says it looks ok. Mutual NDAs are standard fair in the business world, especially from an established company.

[rlucas]

The problem here is confusing something that might be "standard fair in the business world" with something that is very much out of market in the startup investor world.

If OP is entertaining a commercial relationship with an established, larger company -- and there might be an investment component alongside that (a "strategic" investor) -- then it generally makes sense to play normal commercial relationship rules. And one of those is that a BigCo generally gets what it wants in terms of NDAs, within reason, before it opens up.

But if OP's investor purports to be a "real" investor (financial and serial) then there are serious yellow/red flags.

(A "real" investor is one who is financially motivated but also has interest in doing several deals in the community into the future -- hence, they have a reputation to protect and they will tend to hew closer to market norms.)

From the VC perspective, if I had a good customer lead (in my portfolio or otherwise) for a new application of an unfunded startup's technology, I would unhesitatingly make the intro. It benefits me several ways: 1. it may help the customer; 2. seeing how the customer responds is extra diligence information to help me form an investment perspective; 3. if it works out, I am viewed favorably by the startup and more likely to have my term sheet accepted going forward. (This is not speculation; in fact, I am a VC and we do this sort of thing all the time.)

It would be a strange situation, indeed, where I would feel the need to forgo those benefits because of needing an NDA.

(Now, if it's the end customer who wants the NDA, then the normal "commercial relationship" rules, above, apply.)

[chews]

I came here to basically say the same thing, I've raised from amazing investors and raised from mediocre ones. One thing is certain, while an investor has a lot of pull in companies, nothing statistically has screwed them up more than entrepreneur naiveté. Truth of the matter is that founders screw companies far more frequently than investors do, because they intrinsically feel right in every situation, their cognitive bias is introduced into every decision. NDAs are part of the standard practice of business, if you can't get past that, this whole process is going to be fraught with a lot more anxiety. Good luck.

[rilita]

"Everyone else is jumping off the cliff. Just go with it."

Just because other people agree to such ridiculous conditions, and they are not typically abused, does not mean that it doesn't happen.

[edoceo]

Don't. The concerns about "an undesirable partner" will explode in your hand. Also it's the kind of move that could scare other investors. Money is nice but the wrong money is deadly. Please wait for the right money.

[chrisgoman]

No, just walk. Now that you know there is a client, go find the client yourself if you really want to pursue it. Most likely, it will be a waste of time and distraction to what you are trying to build anyway

[kwiki]

Thank you all for your replies which I'll go on an study further. I'm honoured you all took the part of your busy schedule to suggest us what to do.

From all your answers I feel that I might have mistaken the term "investor": we are not sure but we think they are going to ask to create a new-co, rather than investing money and getting shares of the company. They plan to access funds from other investors or grants. Though we are not sure. In this case they are probably more a "business partner"

[pbreit]

I would ordinarily suggest steering clear of an odd situation like this but if the money's good, the downside seems limited since I can't see any reason for you to need/want to disclose information they provide to you. It doesn't sound like you are entering a "non-compete". Obviously, talk to a lawyer.

[Firegarden]

Another option is to stall as best you can to see if there is any reason to sign the thing at the last minute. Some times delaying a decision can give you much better results.

Also - ask your gut. What do you believe is true about this situation if you do sign the agreement - be specific.

[logn]

So they can revoke your client at will? Kind of a non-compete? "Upon the request of the disclosing party or upon termination of this Agreement, whichever is sooner, the receiving party shall cease use of Proprietary Information received from the other party"

[DevX101]

Don't sign it

If they are still open to investing, don't have them lead the round

[jheriko]

i'd guess the investor is the sort of company with standard policies and practices that include signing of NDAs for even potentially sensitive information to protect themselves in a paranoid way. lots of people 'just doing their jobs' will ask you to sign an NDA without much thought about what it might mean.

never attribute to malice, that which is more simply explained as incompetence.

if its not that sort of company, negotiate it away... although it sounds to me like you aren't keen anyway.

[spiritplumber]

Make sure the NDA is symmetrical.

Make sure you know where the other guy lives.

Make sure the other guy doesn't have a history of barratry.

[aikah]

Ask your lawyer ,that's the only suggestion you should be listening to here.Really.

[chriogenix]

do you see any upside in entering into this agreement? sounds like you already know the answer to your question but to be safe have a lawyer review and see what downsides could come along with being party to this agreement.

[arikrak]

You should probably consult with a lawyer.

[joezydeco]

Exactly. How is this NDA "mutual" if your side has had zero input into the document?

Pay a lawyer to have it reviewed/edited, or dump it outright.

[awinter-py]

It's mutual in that both parties are agreeing to respect each other's CI.

[joezydeco]

Signing a unilaterally-written document is not "mutual", no matter how the other party wants to label it. Sure, the text inside says "we won't divulge each other's IP", but that's only one part of the agreement. Are the penalties equal? Are you forfeiting venue or agreeing to arbitration in a default?

If you do sign it without legal review, that's just foolish.

[rlucas]

There are two senses of the term "mutual" being conflated here.

Grandparent is correct that as a term of art, a "mutual" NDA is one that puts non-disclosure obligations onto both parties.

Parent is perhaps usefully pointing out that the agreement is likely not "mutual," meaning entirely symmetric and evenly weighted between the parties. A fair argument, but confusing to folks who are working out NDA terminology 101.

Still, though, you'd call it a "mutual" NDA to distinguish it from a one-way NDA.

[sharemywin]

you probably need to decide what on your part is confidential.

[jackChallis]

Get a professional lawyer who is paid to have your back.

[patphelan1]

RUN