Ethics in VC: How much confidentiality should founders expect?

Sometimes we are challenged to examine the very fundamentals of how we work. During a recent industry panel discussion, I was prompted to think hard about one of the building blocks of being a VC business by a nervous founder.

This founder had been on the funding trail for three months and had real concerns about the integrity of some of the people he had met.

“I have found out that some of those meetings were held as information-fishing events to pass on to VC friends who have invested in my competitors. Do we need to tighten ethics in the industry?” he asked.

The question itself upsets me because it means that VC has an image problem amongst founders, or worse, that there is no smoke without fire. In either case, we are all the poorer for it.

I tackled the question briefly during the panel discussion and, given the amount of feedback I’ve had since, I also wanted to prompt a more public industry dialog around the behavior founders should be able to expect from VC investors. If we can state clearly what is acceptable and what is not, then founders can confidently challenge those who behave badly.

Also by making my own position public, it is a powerful way of holding myself accountable to it. One of the privileges of starting a new VC business — or any business — is embarking with a blank sheet and building something new, something better. We won’t always get it right at BGF Ventures, but we do want to help set the highest possible standards between VCs and founders.

No entrepreneur should have to let concerns about confidentiality stop them from approaching VCs. After all, they need to realize that increasingly the power is in their hands. Venture capital itself is now highly competitive, and investors are only as good as their reputation amongst founders. Acting with high integrity is a key part of staying competitive.

Let’s backtrack to find the source of the issue. In order to pitch for VC funding, a startup needs to provide a lot of commercially sensitive information (trading data, growth plans, key hires) to a lot of people. This is normal practice, but it can make founders feel vulnerable.

Startups operate in a competitive market and should therefore take appropriate steps to stop their commercially sensitive information falling into the wrong hands, but this should not make them overly wary of pitching to VCs.

Written information you share with any VC investor should be treated in strict confidence and not shared outside their organization unless you have agreed. Without this benchmark of professionalism, our industry simply wouldn’t work.

Written NDAs (non-disclosure agreements) are very rarely used in our industry, primarily because they are not practical (a small investment team can receive thousands of business plans per year). If you have reason to doubt someone’s intentions, then ask them to confirm (either verbally or by email) that they will treat your information in confidence. I’m not a lawyer, but my understanding is that this can create a legally enforceable obligation between you and the investor.

Instead of asking for an NDA, a founder who contacted me recently sent a polite note saying: “Hi Rory, I’m so glad you liked our deck and want to meet to discuss further. I’m about to send over our detailed business model, can you please confirm by reply that it will be treated in confidence and not shared outside of BGF Ventures?”

Now let us tackle the question of how and why VCs share information. This was the issue that so upset my original questioner and drew so much interest from the other entrepreneurs in the room.

VCs compete with each other, but they also co-invest with each other. If you are concernced that an investor could discuss the details of your business with other investors, make this clear to them in your conversations. The default position should always be that a VC shouldn’t discuss sensitive details about a company without a founder’s green light.

Every investment we have made at BGF Ventures has included a co-investor (VCs and/or angel investors). But in all of these cases the co-investment discussion was either instigated by the founder themselves or the co-investor was already a shareholder in the company. I’m confident that the nature of these co-investment discussions helped the founder close the round they wanted and in some cases probably helped them improve the terms.

VCs are social animals. Just like founders, they learn by talking to their peer group. You can and should expect VCs to talk to other investors about people, companies, and markets. In fact, we love nothing more than talking about the future of technologies, industries, highs, lows, tactics, strategies, and founders. Loving what you do and talking about it is NOT an excuse to violate founder or company confidentiality.

One of the benefits of being a VC is that we get to see a lot of startup companies — this means we get to experience first-hand a lot of startup lessons. As with anything in life, all of these experiences shape our perspective and will likely be used to influence the advice we give to other startups in the future (particularly those we invest in). Once you learn something, it’s impossible to unlearn it, but, importantly, confidentiality always comes first and specific company data should never be shared without permission.

Imagine a startup world where each founder was able to leave an open and transparent review of every VC encounter. A TripAdvisor for venture capital. This would quickly weed out any bad behavior and would almost certainly improve quality overall. Sadly, we don’t and can’t live in this reality. Full and frank disclosure is unlikely, because the guests in this analogous world will likely have to stay with the same few hotels over and over again for follow-on fundings.

But that doesn’t mean founders can’t hold VCs to account. Founders increasingly have the upper hand in this dynamic. After all, venture capital itself only exists to serve founders in building their companies. By pulling together in groups — through peer networks (events, email, and instant messenger) — founders can help each other hold VCs to account and maintain the highest level of ethics and integrity.

Finally, founders should balance their natural desire for confidentiality with the desire to share details of their startup with VCs, which could lead to securing much-needed investment. Competition rarely kills a startup, but running out of cash does!

Here are some practical tips for improving the fundraising process. Keep in mind this represents my own point of view. Ultimately it’s up to founders to make up their own mind and, if in doubt, discuss directly with a lawyer.

• Share this article: We can start an industry dialog and align ourselves around a set of agreed principles on best practice behavior.
• Don’t hold back: Be prudent and do your homework, but don’t let confidentiality hold you back.
• Research: Do your research on VCs before contacting them. Take references from other founders.
• One step at a time: Create an initial intro deck that you’re happy to share with someone you’ve never met before. Give just enough information to catch their interest
• Clear expectations: You don’t necessarily have to ask for an NDA, but do state “confidential” on the material you share. If you’re worried (e.g. you’re in a particularly competitive market or you have sensitive IP), then ask the investor to confirm confidentiality and thus create a legally binding commitment. If you are not too worried, then don’t do anything to create more steps in the process.
• Conflict checking: If you’re concerned, ask for confirmation that they don’t have any conflicts before meeting them.
• Rules of engagement: Once you’ve met with a VC, be clear on the nature of the conversation you want to have e.g. “We want to raise $X million and we’d love to consider you as a potential lead investor. We’re in the early stages of our funding round, so for the moment we’d kindly ask you not to discuss the opportunity with anyone else.” If there are going to be multiple investors in the same funding round, then make sure you control the conversation.
• Stick together: Create and join founder peer-networking groups. Work to help each other

Rory Stirling is a partner at London-based BGF Ventures.