The Right Time to Use NDAs
A non-disclosure agreement (“NDA” or “Confidentiality agreement“) is a useful tool for protecting your confidential information. It’s also an effective way to inform the other party that you prioritize confidentiality in your dealings.
However, there are times when it’s not appropriate to ask for and use an NDA.
You may have already heard that almost all Silicon Valley venture capitalists and angel investors will ignore your request for a meeting if you dare ask to sign this type of legal agreement to do a pitch.
Asking to sign an NDA when it’s not appropriate reveals your naivety and damages your credibility.
Similarly, some freelancers will refuse to work for you if you request an NDA too early on when you still haven’t confirmed that you want to work together.
So when is the right time to request for, use and sign an NDA? Here are 8 suggestions.
In-depth business discussions
It’s always wise to limit how much important information you share with another until you know that you can trust them and you’re sure that you want to take the business relationship deeper.
You may be worried that if you share your secrets with another party, they may misuse the information for their own purposes or share it around recklessly. Rather than ignoring your fears or halting your discussions, especially if there’s a high possibility that you’ll want to work together, protect your confidential information with an NDA.
If the other party is truly serious about the potential of you both working together, she/he will normally agree to the terms of this legal agreement, especially if the terms are reasonable.
Confidential information can include things such as customer lists, technical designs and your business plan.
Here’s an example of what can be included as “confidential information,” taken from Accuride Corp’s Confidentiality and Non-Disclosure Agreement:
It’s also generally appropriate to ask to sign an NDA if both parties are intending to share confidential information and the information needs to be protected.
In such a case, an NDA would protect not just your confidentiality but also the other party’s (both parties are obligated to keep the other party’s information secret).
This kind of agreement, that protects both parties, is called a mutual, two-way or reciprocal NDA.
As freelancers are not attached to you under a permanent contract, you may want to be careful what you share with the freelancer.
An NDA is not required if you don’t intend to share any confidential information with the freelancer.
However, you may be hiring a marketing expert to help you grow your business and you need to provide them with your current customer lists.
Alternatively, you may be considering hiring a developer to help you develop something technical such as mobile software where you need to share information such as source codes and business strategies.
Another good time to ask someone to sign an NDA is when you’re hiring the freelancer to help you develop something new that has intellectual property (IP) rights tied to it.
In this case, you want to ensure that the IP rights transfer to you properly and you can combine “work for hire” clauses along with non-disclosure clauses in the agreement you’ll sign with the freelancer.
It’s not unusual for startups and other companies in the tech industry to require their employees to sign an NDA before they begin employment.
Normally, the clauses to bound the employee to confidentiality obligations are included along with the employment contract.
Most employees don’t object to these clauses as most employees accept that there’s an ethical obligation to protect the secrets of the employer that they work for.
Licensing negotiations normally require the sharing of confidential information as you have to convince the potential licensee of the advantages and benefits of your product/service and why they would want to be part of it.
Because of this, you should consider requesting an NDA before these negotiations begin.
An example of a case where non-disclosure agreements turned out to be essential for the party revealing confidential information is the case of Convolve, Inc. And Massachusetts Institute of Technology v. Compaq Computer Corporation and Seagate Technology, LLC.
Although the aggrieved party Convolve did not prevail due to its failure to comply with the non-disclosure agreement, the case does demonstrate the dangers of sharing confidential information with potential licensees that could later become competitors.
Similarly, you want to make sure that whenever you allow another party to evaluate your product/service, that they have signed an NDA and agree not to reverse-engineer your process.
This is especially true for software applications, where you could potentially reverse-engineer the software.
Wingware Python IDE’s non-disclosure agreement is an example of an agreement that’s created to allow another party party to evaluate Wingware’s products:
Working with potential investors
NDAs are mostly a thing of the past with venture capitalists and angel investors, especially in the tech world.
Most of them (especially those who invest in startups as a full-time job or sit on several boards) refuse to sign this agreement as they are inundated with requests for pitches every day.
However, this doesn’t mean that you should never ask to get this type of agreement drafted and signed when it comes to potential investors. Outside of the tech world, NDAs are still accepted and used.
Although it’s not a good idea to ask an investor to sign the agreement before your pitch, they are normally more agreeable with signing one when they’re serious about investing in you.
Protecting intellectual property
NDAs are a MUST if you intend to share trade secrets.
The law is clear: if you want to keep your trade secret status, you need to take reasonable steps to protect the confidentiality of your trade secret.
Apart from trade secrets, you should also require NDAs if you are intending to apply for a patent for your invention later on. This type of agreement can be used to supplement intellectual property rights.
Supplementing other agreements
When you’re getting the other party to sign other agreements it might be good time to ask for an NDA as well.
- A manufacturing agreement
- An investment agreement
- A corporate governance document
- A technology licensing agreement
In this type of situation, both parties have already decided to form a formal relationship with each other for a perceived benefit. The additional agreement to protect confidential information will probably also be a good supplement to the existing agreement.
Sale, merger and acquisition of business
Decisions such as considering the sale of your business, merging with another business or acquiring another business tend to shake the stability of a business, including a business’ clients and employees.
But in the event that negotiations break down and no agreement of a sale, merger or acquisition is reached, there’s no need to destabilize the business.
While negotiations are underway and nothing is confirmed, NDAs can be used to maintain privacy between the parties involved in the negotiation.
As an additional security measure
NDAs should be used in addition to security measures you take to protect your confidential information.
Remember that these legal agreements provide you with legal recourse in case of a breach, but most legal actions are costly and take time.
The best thing you can do is to avoid the exposure and misuse of your confidential information in the first place:
- Limit the sharing of your confidential information unless it’s truly necessary to do so
- If you have many employees working for you, consider implementing an information security policy if you don’t already have one.
- Training should be provided to employees to help them identify what confidential information is and how it should be treated and stored.
- Before you share any confidential information that you cannot afford to be exposed or misused, you should ask for an NDA.
In general, it’s better to be safe than sorry.
For example, Sabeer Bhatia, the founder of Hotmail, took confidentiality very seriously. He collected over 400 agreements from employees, friends and roommates and he believes that this gave him a lead-up from competition.
- If the other party refuses to agree to the NDA, then you should consider limiting your amount of sharing to generic, non-confidential information and avoid revealing anything that you cannot afford to lose.
If you’re making a pitch deck for a venture capitalist or angel investor that refuses to sign your NDA, you can also choose what information you’ll place in that pitch deck.
By using general terms rather than revealing specific technical information, you’re allowing the investor to evaluate the potential of your business without knowing the details of how it’ll be executed.
Credits. The following icons are from The Noun Project: “Business Meeting” by parkjisun, “freelancer” by Jenny Chisnell, “hiring” by romzicon, “negotiations” and “sales” by Gregor Črešnar, “investor” by Rflor, “documents” by BenPixels, “Legal advice” by Miroslav KURDOV.
Dec 12, 2017 | Non-disclosure Agreements
This article is not a substitute for professional legal advice. This article does not create an attorney-client relationship, nor is it a solicitation to offer legal advice.