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Non-disclosure Agreements in Venture Capital Transactions

BY Thomas C. Klein
September 03, 2003

Occasionally a venture fund will receive a request from a potential portfolio company for the venture fund to sign a non-disclosure agreement prior to commencement of due diligence. The proposed non-disclosure agreement would commit the venture fund to maintaining the confidentiality of the company's information disclosed to the venture fund in the course of the due diligence investigation. Entering into non-disclosure agreements could restrict the future investing and disclosing activities of the venture fund or its principals.

Industry Custom

It is well established that for an initial meeting with a venture fund, a company seeking funding should not make any request for the venture fund to sign a non-disclosure agreement. Requesting a non-disclosure agreement for these meetings indicates that the company's technology is very weakly protected and that the company's field has low barriers to entry. In addition, the company's business plan should delineate what the company's technology does, not “how” the technology does what it does. The “how” should be protectable and may be the subject of a non-disclosure agreement at some later stage with the venture fund.

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