What Steps Should You Take To Protect Your Idea Before Meeting With Investors?
There are some things you really need to do before you meet with potential investors. The good new is that no steps are necessary to protect your ideas before you pitch to VCs except for one. I’ll get back to that later.
But first, a story:
“We can stop right there,” the VC said to my cofounder “John”.
John, to my surprise, had just asked the VC to sign an NDA.
“I’m not signing an NDA,” the VC continued.
It was the first sign of paranoia from John that would eventually cause him to quit.
And the VC wasn’t wrong to say no to signing an NDA.
VCs see so many deals in the same space that it would be suicidal for a VC to sign an NDA.
Can you imagine what would happen if a VC did sign an NDA to see a pitch deck or do diligence? The firm would open itself to lawsuit after lawsuit on any deal they passed on if they invested in a similar company.
Venture capital is a people business, so get it out of your mind that VCs are going to steal your idea.
A venture capital firm that regularly shares your idea or plan with other entrepreneurs will not stay in business long. Eventually good entrepreneurs will not trust them.
Plus VCs are investors, not operators. Taking ideas and turning them into businesses is NOT their skill set. Finding successful startups, investing and supporting these startups is their skill set.
Having said that…
There are always some VCs that will abuse your trust.
I would be lying if I didn’t acknowledge receiving some competitors pitch decks to “review” for investing purposes. The reality was the information was never helpful.
But that doesn’t mean it wasn’t wrong of the investor to provide the information.
So, what do you, the entrepreneur, do with information you share with potential investors?
Assume your information will be shared from time to time.
It’s gonna happen. That’s life.
Then after you get over the outrage of someone sharing your deck with someone else (Always put a footer in your deck saying “Company confidential do not copy” and send your deck as a pdf, not a power point file), ask yourself this question:
What in your deck is really that confidential after all?
You’ve got bigger problems than an investor stealing your idea if someone can successfully start a business by reading your slide deck. That means your company has little to no barrier to entry.
Just assume that everything in your slide deck is going to be shared. And then make whatever adjustments you want to make.
You can be paranoid like John and be so afraid of investors that you will cost yourself potential investors. Or you can just accept it as the cost of doing business.
Remember, your goal is to raise money.
Walk away from an investor that you feel is unscrupulous because they probably are unscrupulous. There are many more investors that are ethical, so focus your attention on them.
And focus your attention on the most important thing: raising your funding.
So what if a couple of competitors see your slide deck along the way?
They can see you have a great idea, a great team, and great go to market strategy. So what, they still have to figure out how to execute your idea.
It’s the execution that counts in the end.
Okay, so what is the one thing you should do before sharing your idea with an investor?
File patents on any of the patentable parts of your idea before you present to an investor. It’s unlikely you’re going to go into detail about anything patentable , but it’s just smart to do.
Filing the patents early has more to do with getting patents filed before any potential competitors than any worry about investors stealing your idea.
You really need to worry about your cofounders stealing your idea, not your investors.
I’ll tell you from personal experience that it’s a lot more likely one of your cofounders will steal your idea than an investor. That’s what happened with us.
John, the same paranoid cofounder that wanted an investor to sign an NDA, quit about one month after this meeting, stole the idea and business plan for my company down to the slide deck. John then tried to raise money on the same plan.
It was only through a combination of John’s paranoia, perseverance on our part, and luck that we got funded and John didn’t get funded.
For more, read: What Are The Eleven Steps You Can Take When A Co Founder Quits?