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What Founders Need to Know About Non-Disclosure Agreements

An article we liked from Thought Leader Bryce Warnes of Capbase:

Should You Send Prospective Investors a Non-Disclosure Agreement?

If you’re approaching a potential investor to pitch your startup, is it a good idea to have them sign a non-disclosure agreement (NDA) first?  Non-Disclosure Agreement

No.

That is, except for a few specific—and rare—instances, there is almost no occasion when it’s wise to ask a prospective investor to sign an NDA.

In fact, most of the time, sending an NDA will harm your chances of getting funded. It will also make you look dumb.

Let’s look at the reasons why—as well as the few, rare occasions when you should send an NDA.

What is a non-disclosure agreement (NDA)?

A non-disclosure agreement is a legally binding contract that establishes confidentiality between you and another party.

NDAs are used by businesses entering into negotiations with each other. It’s also common for a business to have employees and contractors sign NDAs.

The NDA specifies what kind of information you’re prohibited from sharing with other parties. Then it says, in essence, “We reserve the right to sue you if you break the rules.”

Sometimes, during negotiations, the parties involved will sign a mutual non-disclosure agreement, each promising that they won’t share information about the negotiations with outsiders.

Why do people sign non-disclosure agreements?

A non-disclosure agreement prevents the signee or signees from using sensitive information to gain an unfair advantage.

Example: A larger company is interested in buying your company. During negotiations, you get access to confidential financial information. Now, you could take that information, and trade it with one of their competitors in exchange for a better acquisition deal. But if you do, the first company will be able to sue you—thanks to the NDA.

If you’re an employee and you signed an NDA with an employer, it’s because you may become privy to information they don’t want to share with the world at large—like their...

Read the rest of this article at capbase.com...

Thanks for this article excerpt to Bryce Warnes of Capbase.

Photo by Andrea Piacquadio from Pexels
 

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