The great Non-Disclosure Agreement debate. VCs 'never' sign them so we are all told with the reasons generally being centered around we VCs have to be free from any potential conflicts, we see all comers, etc, etc.
This question came up both at the TVG breakfast and yesterday so I'd thought I put down my commentary on this issue and what you might consider doing as you face this issue.
First, and most important: Never say anything confidential in the first meeting with a Venture Capitalist. There is no reason why you shouldn't be able to explain what you do, what problem you solve, etc, without having to give away the secret sauce. The first meeting should be treated as an introduction.
The argument about having to drop your draws, open the kimono, etc, to make a first impression is wrong. What you should be doing is convincing the potential investor that you have something which could make a good return on an investment. What they should be doing is convincing you that they are a firm you'd like to do business with.
So, don't ask about an NDA in the first meeting. Assume the first meeting is exactly the same as if you got invited to keynote the Consumer Electronics Show to talk about your product/idea/service. Anything you'd wow the crowd with, there you go. Simple.
You might get "How do you do that" as a question. Simple answer: We have a proprietary process, etc, that we'd be delighted to share with you in great detail should our company and your firm decide there is a business transaction happening. Anybody that tells you they need to totally understand, to the source code level, how something works before they can make a decision about the business/space, is just not being fair to you. If you have patents pending, disclosures going on with lawyers, etc, it will all come out in Due Diligence. In my opinion every drop of secret sauce knowledge is not required to gauge interest or move the process to more detailed stages.
A simple example. Let's say you have a new web based translation service. This service allows a person to speak and the service translates your spoken word into 19 languages simultaneously both in streaming audio and live typed text on the screen. You present me with contracts valued at 2 million dollars for the first version and show me a model on how customer service orgs, governments, etc, will pay billions for this. I say, whoa, that's cool. I get excited. I don't need to know the secret sauce at that point to do some work and start to review. If you say, it is not a basement full of people but some amazing technology, that's good enough. I can make a call as to the next steps. In fact, we can go pretty far down the path before I have to tear into the actual how. That, in my opinion, is how it should work.
The place where you want confidentiality? The Term Sheet. You want teeth in it that says nobody can talk about the deal, the terms, anything learned in due diligence, etc, regardless if the deal closes or not. That's what matters to you. Same simple example. We go down the path, get you a term sheet and we are doing due diligence. During that period of time, we determine that the management team has decided to move to Barbados. We say, thanks, no, we're gone. What you don't want it me talking about you, your technology, your people, or anything we did. And, keep in mind, this happens all the time. Oh yeah, I saw that deal, oh yeah, I met him, etc, etc. It isn't anything bad or evil, just is.
My personal opinion is this: I want control (as best as I can get it) over the flow of information if I am out raising money. I wouldn't want one VC to know I am talking or have talked to any other VC. I don't want any VC to know that another VC passed or why or whatever. This is confidential stuff that you should keep close to the vest. You can't stop the talk when you are having an informal meeting with a VC and she talks to another VC. That just happens.
But, if/when you get to that Term Sheet, make sure the confidentiality has some coverage for you as well. Also, during that due diligence, you really do have to tell me what's happening.
Speaking strictly for myself, if I am at the point of term sheet/serious potential for investing, I will sign an NDA that deals with a very well defined promise not to tell promise of what you tell me which is also covered in a strong confidentiality clause within the term sheet.
So, sorry, long post to make a point. That point being: At the appropriate time, getting comfort about the sensitive nature of your business is not a take it or leave it proposition on either side. We can and do keep secrets and promise not to tell.