PE vs. VC: Different Dynamics
Private equity buyouts and venture capital investments have distinct characteristics that affect NDA considerations
Private Equity
Control acquisitions of mature companies
Transaction Characteristics
- Typically 100% or majority acquisitions
- Extensive due diligence (6-12 weeks)
- Leveraged financing involved
- Operating partners review details
- Often competitive auction processes
NDA Priorities
- Broad financing source carve-outs essential
- Portfolio company conflict provisions
- Co-investor sharing rights important
- Management presentation access
- Operating partner inclusion
Venture Capital
Minority investments in growth companies
Transaction Characteristics
- Minority stake investments
- Faster diligence (2-4 weeks typical)
- Focus on growth metrics and team
- Syndication with other VCs common
- Repeat relationships with founders
NDA Priorities
- Carve-out for similar investments
- Portfolio company conflict clarity
- Syndication partner sharing rights
- Residuals for market knowledge
- Shorter confidentiality terms
Critical Issues for Financial Sponsors
NDA provisions that require special attention from PE and VC investors
Portfolio Company Conflicts
PE/VC firms often have portfolio companies in similar or related industries. NDAs must address how these potential conflicts are handled.
Key Provisions
- Carve-out for existing portfolio investments
- Right to continue normal portfolio operations
- Information barrier procedures
- Disclosure of potential conflicts
Co-Investor Sharing
Large PE deals often involve club deals or syndication. NDAs must permit sharing with potential co-investors and limited partners.
Key Provisions
- Pre-approved co-investor list
- Notice vs. consent requirements
- LP disclosure rights
- Joinder or click-through NDAs
Financing Source Access
PE transactions typically involve significant debt financing. NDAs must allow sharing with banks and credit funds evaluating the deal.
Key Provisions
- Broad financing source definition
- Existing lender carve-outs
- Rating agency access
- No prior consent for financing
Operating Partner Access
PE firms rely on operating partners and industry advisors for diligence. These individuals need explicit access rights.
Key Provisions
- Include advisors in "Representatives"
- Operating partner specific carve-out
- Industry consultant access
- Prospective management access
Fund Life Considerations
PE/VC funds have limited lifespans. NDA terms must align with fund economics and potential exit timelines.
Key Provisions
- Reasonable confidentiality term (2-3 years)
- Successor fund provisions
- Assignment to affiliates
- Exit process information rights
Standstill Considerations
Standstill provisions may be less relevant for financial sponsors than strategic buyers, but still require attention.
Key Provisions
- Shorten or eliminate standstill
- Fall-away provisions essential
- Carve-out for friendly proposals
- No extension beyond exclusivity
NDA Terms by PE/VC Transaction Type
How NDA provisions vary based on the type of financial sponsor transaction
| Provision | PE Buyout | Growth Equity | VC Investment | Add-On Acquisition |
|---|---|---|---|---|
| Confidentiality Term | 2-3 years | 2 years | 1-2 years | 2-3 years |
| Standstill | Often required, negotiate fall-away | Rarely required | Not typical | May inherit from platform |
| Financing Source Access | Critical - must be broad | Moderate importance | Less critical | May use platform financing |
| Co-Investor Sharing | Essential for club deals | Important for syndication | Essential for rounds | Less common |
| Portfolio Conflict | Important carve-out needed | Important carve-out needed | Critical - many similar investments | Platform handles conflicts |
| Residuals Clause | Negotiate for limited residuals | Important for market knowledge | Very important - thesis development | Follow platform NDA |
| Employee Non-Solicit | Negotiate narrow scope | Usually acceptable | Less common, shorter term | Important for integration |
Portfolio Company Considerations
When a PE firm's portfolio company is evaluating acquisitions, additional NDA considerations apply. The portfolio company signs the NDA, but the sponsor's involvement creates unique dynamics.
Sponsor Involvement
Define whether and how the PE sponsor can access target information. Portfolio company may need to share with sponsor for approval, but target may want restrictions.
Signing Authority
Clarify whether portfolio company or sponsor signs. Usually portfolio company signs with sponsor joining for specific provisions or guaranteeing obligations.
Conflict Provisions
Address what happens if sponsor is also looking at target (or competitor) for another portfolio company. May need information barriers.
Financing Representations
Portfolio company may represent financing capability, but actual funding may come from sponsor or third parties. Clarify in NDA.
Sample PE/VC-Specific Language
Key provisions for financial sponsor NDAs
Portfolio Company Carve-Out
Nothing in this Agreement shall restrict Recipient from: (a) owning, managing, operating, or investing in any portfolio company that competes with the Company, provided that Recipient does not disclose Confidential Information to such portfolio company; (b) making investments in any company, including companies that may compete with the Company; or (c) continuing the ordinary course business operations of any existing portfolio company.
Recipient represents that it has implemented information barrier procedures to prevent the disclosure of Confidential Information to personnel working with competitive portfolio companies.
Co-Investor Sharing
Recipient may disclose Confidential Information to potential co-investors and their Representatives in connection with a possible investment in the Transaction, provided that: (a) Recipient provides Company with prior notice identifying such co-investor; and (b) such co-investor agrees in writing to be bound by confidentiality obligations no less protective than those contained herein, which agreement may be in the form of a joinder to this Agreement or a separate confidentiality agreement acceptable to Company.
Financing Source Definition
"Financing Sources" means any bank, financial institution, credit fund, institutional lender, underwriter, initial purchaser, placement agent, or other source of debt or equity financing (and their respective counsel and advisors) that may be contacted by Recipient in connection with arranging financing for the Transaction, including any rating agency providing a rating in connection with such financing. For the avoidance of doubt, Recipient may disclose Confidential Information to Financing Sources without prior notice to or consent of Company, provided such Financing Sources agree to customary confidentiality obligations.
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