Brad Feld of Mobius Venture Capital articulated something I find to be true and quite interesting even though it is not well understood among entrepreneurs on the topic of Non-Disclosure Agreements or NDAs.
It is not customary to ask investors to sign NDA's when you pitch them your venture deal. The primary reason that this is so is that a deal better have a better "special sauce" than can be given away in a business plan. For instance, a software firm may describe in a plan what its technology does, but it won't likely provide a copy of the code, so their truly proprietary information is never jeopardized.
In contrast, it is customary to execute an NDA when conducting a negotiation for the sale of the business. As Brad points out, it is driven largely by the motivation if the buyer and seller to open up a dialogue that will include some genuinely sensitive information. While this applies in fact when the buyer and seller are truly competitors, in practice it seems to work even when the acquirer is a private equity firm--with no competing business.
Hence, in my experience, a venture firm that is considering an investment in a venture stage company will not typically be willing to execute an NDA, a private equity firm down the street considering the purchase of a controlling stake in a business is typically willing to execute an NDA.
I generally recommend that clients respect the custom for their respective deal type. Sometimes that means that entrepreneurs feel compelled to leave some key details out of a business plan to avoid disclosing a genuine trade secret while still allowing a venture capitalist to understand key elements of the plan. At the same time, this may mean taking a few days to review, exchange and execute and NDA before starting discussions for an M&A deal.
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