When you’re shopping around your small business plan in the search for investors, it’s sometimes necessary to share what you consider privileged information. To protect yourself, you might want to ask potential investors to sign a nondisclosure agreement. It may not always work, however, if only because of the awkwardness of asking people to agree to terms before asking them for money.
Even if you can’t ask for an NDA, you don’t have to leave your intellectual property entirely exposed. Instead, consider bundling all of the items potential investors need to be told about into a single document, a kind of prospectus-lite, called an information memorandum. This doesn’t have to be an exhaustive collection of everything you’re telling investors, but it should touch on every key piece of information and give a brief summary of each one. When you give this document to prospects, ask them to sign the cover sheet and return it to you to show receipt. Ideally, the cover sheet indicates that the more extensive information in the main prospectus, which is summarized in the memorandum, is privileged, and you have an interest in protecting your ideas.
Holding this receipt is not as good as getting a signed NDA, as it may not be legally binding. It does, however, indicate that the people you’ve spoken to knew what they were being told about your business was A) confidential and B) important to the way you do business. Under the rules of the World Intellectual Property Organization, that alone is enough to classify your information as trade secrets and potentially prevent a recalcitrant investor from sharing it.
You may not always be able to fully protect yourself with an NDA. When you can’t, asking for a receipt of a memorandum of information may be the next best thing.