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Do you ask for an NDA when seeking capital?

Recently I have been seeing a few companies looking for funding ask us to sign an NDA before giving us any info about them. From a lenders' standpoint; a.) I'm not in the business of doing whatever you are trying to do so there is little chance of me going into competition or stealing your secrets and b.) why would I put my company at risk in having to legally defend itself from potential frivolous lawsuits?

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Topic Expert
Keith Perry
Title: Consulting CFO and Business Operations A..
Company: Growth Accelerator
(Consulting CFO and Business Operations Advisor, Growth Accelerator) |

Gary,

Practically laughing over here!
Yes, I hear that one all the time. It drives the lender/investor bananas. It means, generally, that the company doesn't have a competent, seasoned staff. If you've been around the block more than once, you'll know (from the corp side) that an NDA is *completely* inappropriate.

You gave a couple of solid (and more than adequate to make a decision) reasons not to execute an NDA. There are a dozen more. You don't need to enumerate them. Honestly, when they bring that to you, just walk them out there and then. The big mistake I see people in your position make is being polite in this area. Tell the borrower that they clearly don't understand what they just asked for, and that they need to educate themselves, and potentially hire someone who knows why it is *inappropriate* to ask. Use that word. It might help them educate or mature themselves.

I've seen borrowers walk away confused as to why the phone went dead. You don't owe them, but it is a nice thing to let them know what they did wrong.

Counter-example. Back in the day, Gillette needed beaucoup $ to pre-build a bunch of new fancy $15 a pop razors (I think it was the first 3-blade). They went to the bank. They didn't ask for an NDA. They actually said "trust us, we *can't* tell you, but this is a good investment." Extreme example; in that case Gillette could have easily lost their advantage through a leak (a competitor could have simply announced a competing product before Gillette's announcement, for example). But, that is Gillette, in a mature, competitive space. Special case. My guess is you're not dealing with that.

Coda: repeating the "immature staff" comment. The investors I know view that as a big red flag. The business might be sound, but chances are the people are not. Giving $ to people who aren't seasoned is seldom a good idea.

Cheers

KP

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