5 reasons to use a FrieNDA with potential investors

May 5, 2010

When you first approach a potential investor, don’t insist they sign an NDA. Save that for later, when you divulge the intricate details of your plan, and for people you pay, like freelancers, employees and consultants.

Instead, try a “frieNDA”—get introduced to investors through people you know and trust. Ask the investors to keep any particularly sensitive information between you, and let your mutual friends serve as a way to enforce confidentiality. Here’s why:

1.)   When you first begin to woo a potential investor, it’s a bit like flirting with a new love interest. You wouldn’t want to start by asking him/her to agree that they want to have 2 kids and a golden retriever on your first date. It’s a bit presumptuous.

2.)   Some investors will view your request to have them sign an NDA as a sign of naiveté. Venture capitalists, for example, typically refuse to sign NDAs early in the pitch process as a policy.

3.)   Startup success is about 95% execution, and 5% idea. Especially since most startups change their strategies as they go. If all you have is the idea and not the ability to execute, you have bigger problems than NDAs.

4.)   Chances are, someone is already doing what you are envisioning. If not, be sure to ask yourself why not. There may be a good reason.

5.)   Are you really prepared to file a lawsuit? If you think a prospective investor violated an NDA, it’s typically difficult, expensive, and time-consuming to prove it legally.

Got a different point of view? Have you ever seen a founder sue an investor? Please share your war stories.