While nondisclosure agreements (NDAs) can’t protect your business in every situation, they are needed to protect confidential information about your start-up. You need to understand what NDAs are when you need one, and how to create a policy that will protect any proprietary information as your company grows.
What Is An NDA?
An NDA is a legally binding document that is designed to protect your intellectual property (IP) and other proprietary information. In most cases, they forbid the signee from discussing certain information with others or using it for their personal gain. If this contract is breached, you can take legal action to prevent further breaches from happening, or recover damages.
Only certain kinds of information can be protected by an NDA, which you can draft using this Business-in-a-Box NDA Template. The basic idea for your business is not proprietary information, as it isn’t private. If you pitch your ideas at networking events, for example, then your ideas are not confidential.
You can protect company secrets, such as technical processes, business plans, lines of code, or other intellectual property assets that are unique and important.
NDAs are legal documents, but they are only as effective as your willingness and financial ability to enforce them with a lawsuit. They’re still important for setting a tone for confidentiality that should discourage any careless chatter by employees.
Who Should Sign An NDA?
All startups should have a standard NDA in place that you can use to protect proprietary information about your company. When and where you use the NDA will depend on your company and the information that you need to protect. Anyone who knows your proprietary information should sign your NDA.
Independent Contractors
One of the most common and important reasons for using an NDA is for independent contractors who do work for your company. A contractor is not bound by the contractual and social ties that employees are, but they may still come into contact with sensitive or confidential information while they work for you. Any freelancers or contract workers should be asked to sign an NDA before you begin working with them.
Partners
If your company outsources part of your process to an outside vendor or you are partnering with another company on a shared project, it’s a good idea to ask them to sign an NDA too to make sure they don’t misuse any proprietary information.
Cofounders
The people you launched your business with should be people that you can trust. However, as your company becomes more or less successful, this can change. Those who have the most access to your company’s IP should sign NDAs in case they decide to leave the company or try to start a rival company.
Employees
Some companies ask all their employees to sign NDAs and some don’t. The standard employment agreement might cover some of the same ground on company ethics and privacy. If you have employees who work closely with sensitive information, it’s a good idea to have them sign an NDA as well as your standard contract. This will protect you from having secrets revealed if they leave for another company.
Prospective Employees
Late-round interview candidates might also have to sign an NDA if they are given any information or proprietary internal processes during the process of hiring, especially for high-level positions, like CFO.
When You Don’t Need An NDA
NDAs are important, but some startups use them too often and too broadly. This is a waste of time and can make you look unprofessional and lacking in experience.
Common Knowledge
NDAs only protect private information, not common knowledge. You can’t enforce nondisclosure for information that has been shared publically at all, such as in public documents, speaking events, or networking.
Fundraising
VCs don’t usually sign NDAs when reviewing pitch decks or fundraising materials. They will usually consider multiple ideas in similar spaces, and negotiating for confidentiality isn’t practical or efficient on time. Asking a VC to sign an NDA before they review your pitch will make you seem inexperienced and could kill a deal.
Instead, use password-protected documents to prevent unauthorized sharing. You can also then revoke access if a VC doesn’t meet with you.
What If You Forget An NDA?
It can happen. You send out confidential material and then realize you forgot to send an NDA. You can ask the receiver to sign one retroactively and hope they agree. In the future, get a streamlined system in place to avoid the same mistake.
Building A Startup NDA
Create a standardized NDA that you can send out when you need it. You can use a template, or if you create your own, consider these concepts.
Scope Of The Agreement
NDAs have two requirements of signees:
- To keep the information a secret
- To not use the information themselves
Sometimes, you will need to add other provisions, such as noncompete clauses or rules against soliciting employees.
Mutual Vs Non-Mutual NDAs
NDAs can be mutual or non-mutual. A non-mutual agreement is more common. They’re used when only one side is sharing private information with the other, such as NDAs for contractors, employees, and others who are exposed to the private dealings of your company.
Mutual agreements mean that both parties are bound by the terms of the NDA. They’re useful for partnerships when both sides have access to each other’s confidential information. Mutual NDAs are harder to create and enforce, so they should only be used when really needed.
Terms Of The Agreement
Some NDAs last forever, but some recipients ask for them to expire after a certain number of years (two to five is common). This is because most proprietary information becomes either public or outdated over time, so there’s no need for protection. Constantly policing an NDA is expensive too.
Potential Negotiations
Depending on how legally savvy the recipient is, you should see an NDA as the starting point for a negotiation. You should be prepared for the other party to come back with amendments.