SE-KB.1 – Non-Disclosure Agreements

If you’ve been to enough business meetings, chances are someone has shoved a document in front of you and asked you to sign it to protect the confidentiality of their information. Or maybe you were the document-shover, hoping to protect your own proprietary information. This type of agreement is typically called either a confidentiality agreement or a non-disclosure agreement (NDA).

While hesitance to sign a legally binding agreement is understandable, there is nothing inherently onerous or diabolical about an NDA. In fact, every innovative, emerging company should require a signed NDA in advance of any meeting where proprietary information may be shared.

 

What is the purpose of an NDA?

NDAs are intended to facilitate a more efficient and effective evaluation of opportunities and relationships by allowing potential business associates to share ideas freely, without fear that your valuable secrets will be taken from you and used or shared by others.   Simply put, the NDA protects information that is shared by requiring the person receiving the information to keep it confidential.

 

 

When do I use it?

NDAs should be used whenever you or any members of your team are planning to discuss aspects of your company, designs, products, plans or ideas with anyone outside the company. Hopefully, you have NDA-type language already included in your employment and investor/owner agreements (not to mention some possible implied duties that might apply to those folks, as well).

The NDA is usually signed at or prior to the initial meeting with a potential business prospect, partner or vendor. Usually there is no need to sign additional NDAs for subsequent meetings with the same folks. Also, if one officer or employee of a company signs an NDA, that NDA will typically be binding on all other company employees and owners.

 

Can’t I just Download a Form off the Internet?

A simple Internet search can uncover a range of NDA’s available on the Internet, and, to the untrained eye, they may look identical. However, NDA’s can vary greatly, and any one may or may not be appropriate for a specific situation.

Although cash-strapped startups may be tempted to use a form download off the Internet, you should consider why you need an NDA in the first place (i.e., you want to protect your valuable information and ideas) and ask yourself if getting your legal documents from the same place you get your Grumpy-Cat Memes is a prudent business decision.

 

What types of NDAs are there?

The most basic and obvious difference in NDA types is unilateral versus mutual. A unilateral NDA basically says you agree to keep my information confidential, but I make no such promises of my own regarding your information. I recommend this whenever you prepare an NDA, if you can get away with it, because it gets you the most benefit at the least obligation. Of course, your business associate may refuse sign a one-sided agreement.

 

Conversely, a mutual NDA is intended to obligate both sides you and the other guy’s information confidential.   This is often viewed as much fairer and more palatable since it equally obligates both sides.   However, in many instances one side is really doing all the “sharing,” so the fact that the NDA is mutual is as hollow as an empty piñata.

 

At its core, all an NDA is intended to do is protect against disclosure of your information by the other guy (and/or vice versa).   That said, NDA’s can include a number of additional terms that make them much broader in scope.

For example, some also include provisions prohibiting the solicitation of your clients, vendors, employees and other contractors. Others also add language prohibiting you from using any of the information disclosed yourself (e.g., to compete with the other guy).

The specific terms that should be included in an NDA will vary, and you should consult with legal counsel to ensure the NDA you use will adequately address your situation.

 

What else do I need to know about NDAs?

First, check to see which law is chosen to govern the NDA. The jurisdiction selected will determine how the NDA’s provisions will be interpreted. Since laws can vary significantly from state to state – even more so from country to country – it is important that you know which jurisdiction will be applying their law to that NDA. In addition, pay attention to how long the NDA obligation runs. Some NDA’s provide only a short time frame, such as one or to years. Others don’t ever expire.

Also, and this is a common misconception, most NDA’s are drafted to cover initial meetings only, and are not designed to address a long-term business relationship. The role of the NDA is best served in the initial “get to know you” phase when you have to disclose your plans and ideas to see if you and the other folks can work together.  If and when you decide to move forward with a business relationship, that relationship should have its own contract – and that agreement should incorporate NDA-like language of its own.

Moreover, the last time I checked, the local police force doesn’t employ an “NDA SWAT Team”.  Thus, if you suspect that a former business associate or prospect is violating their NDA obligations, it is up to you to initiate legal action (i.e., spend money on your lawyers) to stop them. While you should take appropriate legal steps to protect your rights, the type and extent of the action you take must be weighed against the cost of enforcement.

Finally, you do not need a signed NDA to talk to your attorney in connection with seeking legal advice. The attorney-client privilege is much more powerful and comprehensive than an NDA, and affords the client much greater protection. As such, having your legal counsel sign an NDA is like giving the Devil a map to Hell.

 

In conclusion, NDAs are valuable and useful tools that allow businesses to comfortably share ideas, but they should not be viewed as “one size fits all.” While you shouldn’t be intimidated by them, they are legally binding agreements, so they should only be signed after careful review and consideration. If you are not an attorney, you should consider running all NDAs by your legal counsel before you sign them (or before you send them to others to sign).


The SAVaGe Entrepreneur Knowledge Base (“SE-KB”) is part of a series of articles written and published by CHESTER Business & Innovation Law, a Dallas-based law firm that advises innovation-based entrepreneurs, and emerging companies regarding their core legal issues (www.chester-law.com).   Information provided is for informational and entertainment purposes only, and is not legal advice.