One of the most widely circulated documents in commerce today is the non-disclosure agreement (NDA). As former in-house counselors, our attorneys reviewed dozens of NDAs every week. As we work with more startups and small businesses, we notice extremely divergent views regarding the use of NDAs. Some companies love the idea of using an NDA, some find no use for it, while others are against it, entirely.
In this blog post, we will break down: (i) what an NDA is; (ii) the benefits of having an NDA; and (iii) the reservations startups and businesses have about using them.
What is an NDA?
An NDA is an agreement between a disclosing party (or parties) and a receiving party (or parties). This agreement imposes certain confidentiality obligations on the other party (or parties). An NDA also sets exceptions, a term, and consequences of a breach of those obligations. NDAs are something many startups and small businesses will come across at least once. Any startup or business should have one in their files to use, if necessary.
What Are the Benefits of an NDA?
Arguably the greatest benefit of an NDA revolves around protecting trade secrets. Trade secrets are an intellectual property right (“IPR”). What makes trade secrets unique is that you don’t need to register them anywhere (unlike patents, trademarks, and copyright). If you meet the requirements of protection, trade secrets are the easiest IPR to develop and maintain (it’s free).
Trade secrets can be worth a lot to a company, and keeping them protected is essential. An NDA is a great way to keep this IPR protected from a business’s partners/vendors/suppliers, competitors, and even employees. Draft NDAs carefully to protect trade secrets. As you will see, most NDAs usually terminate after a certain period of time; putting trade secret protection in jeopardy. After an NDA expires, the receiving party could use the information or disclose it; breaking the prong of secrecy.
A properly drafted NDA will protect the confidentiality of trade secrets for as long as they remain trade secrets under applicable law.
An NDA also protects other confidential information, even if such information doesn’t qualify for trade secret protection. For example; if you don’t want other parties knowing you plan to acquire a company, you can add language in the NDA to cover that.
Reservations about NDAs
The comments we hear most often (from startups) are that investors won’t sign an NDA for several reasons:
- they review so many companies that it would be impossible to sign an NDA for each;
- they are stubborn and hold the chips.
- if they breach a startup’s trust and divulge confidential information, the startup will discuss within the community and no one will want to work with the investor, so it’s against their best interest to divulge the info regardless, or
All three of these reasons are legitimate concerns and/or criticism. However, the pros of protecting this vital information may outweigh the cons of not having an agreement governing disclosure in place. Every situation is different and requires a separate analysis.
How can we help?
As startup & small business lawyers and former in-house counsel, the lawyers at the Law Office of Elliott J. Brown have drafted and negotiated hundreds of agreements. Without proper drafting and safeguards, this (potentially) valuable asset for your startup or business may be wasted. Please contact us to find out how we can help you draft a rock-solid NDA, today!