Venture Capital Firms and Non-Disclosure Agreements

By Jed Weiner

Traditionally, venture capital firms (VCs) refuse to sign non-disclosure agreements (NDAs) with potential portfolio companies. The reasons include:

• Non-disclosure obligations with a startup might interfere with a VC’s future investments in the industry.

• VCs explore investments in hundreds of startups and do not have the resources to monitor compliance for a large number of NDAs.

• Individuals affiliated with VCs and who are board directors for other companies may have a fiduciary duty to such other companies to disclose information covered by an NDA. The NDA would create a conflict of interest.

• Many startups do not have valuable sensitive information. The NDA would not offer meaningful protection to the startup yet create downside for a VC.

• VCs feel that an NDA is not needed because VCs would not risk their reputation by disclosing confidential information.

• VCs wish to avoid exposure to frivolous litigation.

It is now more common for VCs to sign NDAs on an ad hoc basis. The reasons include:

• There is more competition among VCs for promising portfolio companies. 

• Many VCs invest in later stage portfolio companies which are more likely to have commercially sensitive information.

• VCs invest in foreign countries where the traditional approach is not established market practice.

Here are some tips for VCs that decide the benefits of signing an NDA outweigh the downsides:

• Do not sign the NDA before an initial meeting.

• Make sure “confidential information” is defined narrowly.

• Exclude affiliates from obligations under the NDA.

• Limit the term of the NDA and reject the obligation to return or destroy confidential information.