A Practical Guide to Angel Investing (2nd Edition)

When to Sign a Non-Disclosure Agreement The vast majority of Angels will never sign a non-disclosure agreement (NDA) just to see a business plan. It is just too risky to expose yourself to the liability when you don’t even know if you are interested in the opportunity or not. Some Angels and VCs will sign NDAs during technical due diligence or to cover specific issues, like seeing provisional patents or inspecting source code. Any entrepreneur who cannot protect his or her secret sauce during an investor presentation is merely demonstrating that they are too inexperienced or unprofessional to invest in. Due diligence is about far more than checking boxes and finding red-flag deal- killers. Good due diligence helps build trust and rapport between the investors and entrepreneurs and builds a solid foundation for a long-term relationship. Frank Erschen adds: “And be prepared for the unexpected. There is no concept of divorce when you make an investment in a startup. An Angel can choose to stop adding to their investment in a company or simply walk away, but there is no settlement that is possible. On the other hand, investees don’t have the same option of walking away from investors, as they have obligations to their shareholders or creditors. The only time the concept of divorce applies is when a wind-down happens and assets, if any, are divided.” Spending time to really get to know all the people in your investee company leads to better negotiations, verifies alignment between parties, and sets you up for how to support your investee in the future. “I’d rather spend a week actually trying to sell their product than follow a conventional approach to diligence. If you work with people – side by side – where they see you as a real business partner, you can learn so much more about the team and the company. I call this ‘diligence from within’.” (Mike Crill, in Maher) According to Benton Leong, there are several end goals of the due diligence process: • Leads to the negotiation of terms

• Helps establish valuation • Educates the entrepreneur • Builds the foundation for the future relationship • Verifies alignment • Identifies the “coachability” of the CEO (Leong)

Going Too Far “Undue diligence” causes harm to the potential investee by wasting time endlessly asking questions and seeking problems. Some “vulture capitalists” will sign a term sheet with a company in order to conduct competitive intelligence on behalf of their current investees. After wasting the company’s time and plundering their IP and plans, they decline to make the investment.

54 A Practical Guide to Angel Investing

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