It’s possible that you’ve heard stories about startups having their intellectual property stolen by competitors or larger companies because they didn’t have a non-disclosure agreement (NDA) in place before discussing their ideas. Although this can happen, it’s not very common. So, when should you ask someone to sign an NDA? Is it necessary to send one before every meeting with investors or business developers?
This article will help you answer those questions. Of course, every situation is unique, so it’s best to consult with legal counsel. If you’re looking for a lawyer, feel free to reach out to us here.
What Is an NDA?
An NDA is an agreement that safeguards confidential information exchanged between two parties. Its main purpose is to prevent the recipient from using or sharing this information with others without the owner’s permission. NDAs should be considered when sharing information that could harm the business if disclosed to competitors or the public. Sensitive information, such as proprietary technology and customer data, should be protected with an NDA during business negotiations. However, not all situations require an NDA, such as when the information being shared is already public knowledge or does not contain any sensitive details.
Key Terms Included in an NDA
When drafting an NDA, include key terms to ensure both parties understand their obligations and expectations. At a minimum, an NDA for a startup should include the following terms:
- Definition of Confidential Information. This section defines what information is confidential and subject to protection under the agreement. Clearly outline which types of information are included and any exclusions or exceptions.
- Exclusions from Confidentiality. In some cases, certain types of information may not be subject to confidentiality under the agreement. Outline any exclusions or exceptions to the definition of confidential information.
- Obligations of the Receiving Party. This section outlines the receiving party’s obligations with respect to confidential information. This may include restrictions on how the information can be used, who it can be shared with and how it must be safeguarded.
- Term and Termination. Define the term of the agreement and any circumstances under which either party may terminate the agreement early. This section also includes provisions for returning or destroying confidential information after termination.
- Consequences of Breach. To incentivize compliance with the agreement, this section outlines the consequences for breaching its terms. This may include monetary damages, injunctive relief or other remedies.
By including these key terms and provisions in an NDA, startups can help protect their confidential information while ensuring both parties understand their obligations.
The Risks of Not Using an NDA
Choosing not to use an NDA can be a risky decision for startups. Without this legal protection, confidential information is vulnerable to misuse or theft.
One risk of not using an NDA is losing a competitive advantage. Sharing sensitive information about a company’s products, services,or operations without proper protection could allow competitors to gain an edge in the market, resulting in lost revenue and decreased market share.
Another risk is damaging a company’s reputation. Leaked confidential customer data or other sensitive information could harm customers’ trust in the company, leading to lost business and difficulty attracting new customers.
Lastly, not using an NDA could make it difficult to enforce ownership rights over intellectual property. In some cases, without an agreement outlining who owns certain information or technology, it may be challenging to prove ownership if legal action is necessary.
When Not to Use an NDA
Many first-time founders believe they have a unique idea that no one has thought of before. They may try to protect it by spamming everyone with an NDA. However, the magic that helps a startup thrive is usually in the execution, not the idea.
An NDA should be used when sensitive information needs to be shared, such as during business negotiations or when discussing proprietary technology such as trade secrets, customer data, and other confidential information that could harm a business if disclosed to competitors or the public.
However, not all situations require an NDA. For example, if the information being shared is already public knowledge or if you already have a contract in place with the other party, then an NDA is likely not necessary.
A common mistake that rookie founders make is insisting that a potential investor sign an NDA before the first meeting, which reveals their inexperience and is likely to turn off a venture capitalist.
Instead, founders should be able to explain the product or service—how it works, why it outperforms competitors, etc.—without revealing specific proprietary information. Then, if the investor wants to dig into the proprietary information in a future meeting, it is appropriate to send an NDA at that point.
Tips for Working with Legal Counsel to Draft a Strong NDA
Drafting an NDA may seem straightforward, but it is important to work with legal counsel to ensure that the agreement is legally binding and provides sufficient protection for confidential information.
Here are some tips for working with legal counsel to draft a strong NDA.
1. Define Confidential Information Clearly
As mentioned earlier, one of the essential provisions in an NDA is the definition of confidential information. Work with legal counsel to define precisely what information should be considered confidential, as well as any exclusions or exceptions.
2. Determine the Scope of Protection
When creating an NDA, consider the extent of protection that is necessary. This may include restrictions on how the information can be used, who it can be shared with, and how long the protection will last.
3. Include Appropriate Remedies
To ensure compliance with the agreement, include suitable remedies for a breach in the NDA. This may include monetary damages, injunctive relief or other remedies.
4. Ensure Compliance with Applicable Laws
When drafting an NDA, ensure compliance with applicable laws and regulations governing confidentiality agreements. Legal counsel can help ensure that the agreement complies with these requirements.
5. Carefully Review and Negotiate Terms
Before signing an NDA, carefully review and negotiate its terms. Legal counsel can identify potential issues or concerns and negotiate favorable terms on behalf of their client.
Working with legal counsel can help ensure that an NDA provides sufficient protection for confidential information and is legally binding. Startups should seek legal advice before sharing any sensitive information to protect their interests and mitigate risks associated with breaches of confidentiality. If you’re looking for legal counsel, feel free to reach out to us here.
Unilateral and Mutual NDAs: What’s the Difference?
There are two main types of NDAs: unilateral and mutual. Both serve the purpose of protecting confidential information, but they have some key differences.
Unilateral NDAs involve one party disclosing confidential information. The receiving party is bound by the agreement to keep the information confidential and not share it with others without permission.
Startups often use unilateral NDAs when sharing confidential information with potential investors or partners. The NDA ensures that sensitive information is protected during negotiations.
Mutual NDAs involve both parties disclosing confidential information to each other. Both parties agree to keep each other’s information confidential and not use it for any other purpose.
When two companies consider a joint venture or partnership, they often sign a mutual NDA. Both parties can feel more secure sharing sensitive information, knowing they are legally protected.
Although unilateral and mutual NDAs serve similar purposes, startups must choose the appropriate type of agreement based on their specific needs. Legal counsel can help ensure the agreement provides adequate protection for all parties involved.
How to Handle Breaches of NDAs
Despite taking precautions, NDAs can still be breached. When this happens, it’s important for startups to act quickly to minimize potential damage and enforce their rights under the agreement.
Here are some steps startups can take when an NDA is breached.
1. Gather Evidence
The first step is to gather evidence of the breach. This may include emails, documents or witness statements that support the claim that confidential information was disclosed without permission.
2. Notify the Other Party
Once evidence has been gathered, notify the other party in writing and demand that they immediately stop using or disclosing confidential information. Clearly outline the specific terms of the NDA that were violated.
3. Consider Legal Action
If the other party fails to comply with the demands outlined in the notification, legal action may be necessary. This may involve seeking injunctive relief from a court or pursuing monetary damages for any harm caused by the breach.
Common Mistakes to Avoid When Drafting or Using an NDA
While NDAs can provide valuable protection for confidential information, startups should avoid common mistakes when drafting or using these agreements.
Here are a few examples.
1. Failing to Clearly Define Confidential Information
Clearly define what information is confidential and subject to protection under the NDA.
2. Including Overly Broad Restrictions
Avoid overly broad restrictions that could make it difficult for the receiving party to conduct business as usual.
3. Failing to Update NDAs as Business Needs Change
Review and update NDAs periodically to ensure they remain effective over time.
4. Using Generic Templates Without Customization
Customize NDAs to specific business needs.
By avoiding these common mistakes, startups can help ensure their confidential information remains protected while fostering positive relationships with partners and investors who receive sensitive information related to their businesses.