Non-disclosure agreements (NDAs) can be a topic of contention among entrepreneurs, investors, advisors, and inventors. Many entrepreneurs are hesitant to share their ideas or inventions without a guarantee of confidentiality. However, professional investors often decline to sign NDAs, not only to avoid the chance of litigation but also because the ideas presented to them are not always proprietary.
Regardless of the situation, keep in mind that creating a non-disclosure agreement may take some negotiating. If you’re in the process of writing an NDA, or you may need to do so in the future, here are some do’s and don’ts to help you along.
When Should You Create an NDA?
When you need to reveal confidential information to another party in the course of a business transaction, it may be wise to create a non-disclosure agreement. Having an NDA in place is especially recommended if you are:
- Hiring employees, consultants, or freelancers who will have access to confidential or proprietary information
- Negotiating a sale or purchase with an individual or business
- Presenting a new design, product, or technology to shareholders, buyers, or licensees
- Sharing financial records with a potential business partner or shareholder
- Showing an invention or revealing a trade secret to an investor
Do specify what you consider confidential information. To prevent confusion for the receiving party, it’s a good idea to nail down your definition of what is confidential, or at least clearly identify what they must keep private. When making your list, think about your trade secrets. What sets your business, idea, or invention apart? What would your competitors want to know about you?
To help, here is the kind of information that is typically classified as confidential in non-disclosure agreements:
- Vendor and customer lists
- Personnel records
- Financial and accounting records, such as revenues and profit targets
- Marketing strategies, messaging, and pricing
- Product designs, breakdowns, and formulas
- Proprietary software and technology
Do outline the receiving party’s obligations. Your NDA should specify the duties of confidentiality, namely non-disclosure (prohibiting the sharing of information with a third party) and non-use (forbidding the use of the knowledge for personal gain). Depending on the sensitivity of the information, you can be more or less restrictive, but keep in mind that NDAs are often judged unenforceable if they’re too constricting for the other party.
Do specify a jurisdiction. It may feel like you’re softening the terms of the agreement, but spelling out exactly where the terms of confidentiality apply, be it a region, state, or country, can protect you in the long run. For instance, without geographic restrictions in place, the receiving party can easily argue that they can start a business or sell a product anywhere.
Do include non-competition and non-solicitation clauses. Most non-disclosure agreements have these clauses to protect your confidential information in addition to your livelihood. A non-compete clause prevents the recipient from joining or starting a company that competes directly with yours, while a non-solicit clause prevents the receiving party from recruiting your employees to work for them.
Do account for compelled disclosure. The receiving party can do everything in their power to follow the terms of the agreement, but if they’re asked to disclose information to a court of law or a government agency, they must comply. In the NDA, you can request the receiving party to notify you should this happen and to only share what is required.
Do account for a breach of the terms. Money damages may not offset the harm caused by a breach, but it’s still important to address the consequences of failing to comply with the terms of the agreement. A remedies clause typically grants the discloser the right to ask for an injunction (a court order that requires or prohibits a certain action) and to seek damages for lost profits.
Don’t reveal any information without a signed agreement. In most situations, the receiving party is not bound by any oral agreement. For that reason, do not share confidential information with the other party until they have signed an NDA.
Don’t share more information than you need. Think of it this way: the less information you disclose to the recipient, the less that can be stolen or disclosed to an unauthorized third party. So before sharing any knowledge, ask yourself what the recipient really needs to know.
Don’t include knowledge that is not confidential. Certain types of information are not appropriate to include in a non-disclosure agreement, including:
- General industry knowledge
- Information that is in the public domain (i.e. is it easy for someone to access the information?)
- Knowledge the receiving party had prior to the creation of an NDA
- Information obtained from a third party who had the right to disclose it
- An idea, process, or product created independently by the recipient
Don’t prohibit third party representatives. Be aware that the recipient may need to share your private information with an attorney, accountant, assistant, or other party. To that end, you can include a clause that lists to whom the receiving party is allowed to disclose information. Some NDAs even require the recipient to notify their representatives that the knowledge is secret and to bind them by the same terms of confidentiality.
Don’t leave the agreement open ended. Most information and technology is useless or obsolete after a few years, so to avoid a legal gray area, include a termination date in your agreement. Most NDAs last for two to five years, or end when the business arrangement does.
The Right Approach to NDAs
A good NDA is specific, but not too restrictive. While it shouldn’t be overly demanding for the recipient, it should still protect you if your information is leaked. Whether it’s an email list or a proprietary recipe, your “secret sauce” is your most valuable asset, so be sure to protect it.
What are your do’s and don’ts when it comes to NDAs?