Sunday, August 21, 2011

Angels, Entrepreneurs, and Gadflies: How Angels View NDAs

Many entrepreneurs ask angel investors to sign non-disclosure agreements (NDA) prior to discussing their businesses. They never hear back from the angels and wonder why.

One reason may be that, initially, angels only want enough information to determine whether a deal interests them. All they want to hear about are the problem(s) solved and the benefits of the entrepreneur’s approach. Rarely do angels want more, much less detailed disclosure of the entrepreneur’s intellectual property (IP).

Indeed, too much early information can hurt the angel. For instance, if a play has widespread applicability, an NDA might preclude the angel’s participation in other deals. Also, pre-existing deals can ensnare the angel in a conflict of interest if they learn too much about a competitive approach under an NDA. Besides, if a deal comes to the angel through an investment screening group, the information usually carries with it a condition of non disclosure.

Thus, often, an entrepreneur-NDA-request goes something like the following. The entrepreneur confronts an angel with an NDA. The investor thinks, “They don’t have any IP protection! Otherwise, they wouldn’t need my signature.” Next the angel thinks, “What will this group do at go-to-market time? Haven’t they thought through their IP position? They are going to get ripped off.” From many angels’ perspectives, therefore, NDA-bearing entrepreneurs are gadflies.

As a result this blog recommends that, prior to fund-raising, entrepreneurs develop and begin executing an IP plan. Of course, not everything must immediately be formalized into a patent, copyright, or trademark application prior to speaking to financiers. Many elements of a business can be held as trade secrets during pre-launch fund-raising. Then, once an angel becomes interested in a play they will ask for more information and won’t mind signing an NDA.

Hall Martin (Vice Chairman of The Baylor Angel Network, Director of The Wilco Angels Network and Director of The Texas Entrepreneur Network) co-authored this article. 

For more information about entrepreneurship in general see The Texas Entrepreneur Network.  

For more information about developing and executing an IP plan see or call The Villhard Patent Group at (512) 897-0399.

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