NDAs for Startups

What is an NDA?

An NDA (Non-Disclosure Agreement, Confidentiality Agreement, etc.) is a contract that says:

"When I tell you my secrets, you agree that

• they still belong to me
• you will only use them for a specific purpose
• (usually) when I ask you, you will return or destroy any copies, notes etc. you made."

What is an NDA for?

The purpose of an NDA is to preserve the value of intellectual property. It does this by:

• first and foremost, concentrating the mind of the other party on their obligations of confidentiality
• secondly, and very much less importantly in practice, giving you something you can take to court to (if you're lucky) stop an unauthorized disclosure about to be made or (if you're not) get some compensation for a disclosure already made.

Almost invariably, if someone has already told your secrets, it's too late to make them secret again.

As your business matures, the second, remedial, aspect of NDAs may gain in importance. A good collection of signed and dated NDAs will present an attractive aspect to a potential buyer of your business.

Careful use of NDAs is also vital when disclosing anything you might want to patent.

What should an NDA look like?

Since the main use of an NDA is to strike fear into the other party, your NDA must be impressive.

Impressive means well drafted, appropriate to the situation, and tailored to the specific disclosure. One size does not fit all.

To be well drafted an NDA should meet, or preferably exceed, industry expectations. Remember that this document is probably the first of your work to be seen by the other party, so it provides an opportunity to appear serious and professional. Also remember that the other party has probably seen a thousand NDAs, so they will have a good feel for what a decent document looks like.

To be appropriate the NDA should suit the type of party you are dealing with. Sometimes a long and scary NDA will be necessary to really focus the other party on the obligations they are undertaking. Sometimes something short and sweet will demonstrate that everyone understands what ought to be happening. Your relationship with the other party will also influence the form of the NDA:

• Investors are of many types. VCs are notoriously reluctant to sign NDAs in many jurisdictions, but sometimes it will be necessary to insist in order to maintain the value of your company. Other potential investors (friends, family and fools or angels) may not be so reluctant, and may well need to be educated as to the need for confidentiality.
• Employees should have their confidentiality obligations spelled out in detail in their employment agreements. You should also periodically remind your employees of the importance of these obligations, and use exit interviews to collect any notebooks, files or other material they might have.
• Suppliers come in all shapes and sizes, from tailor-made component manufacturers where it is obvious you are handing over confidential blueprints to the person that fixes the telephones, where they will also, if not so obviously, be in a position to acquire your secrets.
• Customers will obviously want to get as much for their money as possible. Make sure they don't get your technology along with your product.
• Partners will probably be sharing their secrets with you as well, so a mutual NDA (i.e. one where the obligations are reciprocal) will be appropriate. This might also make negotiations easier.

To be tailored an NDA must reflect the specifics of the situation. Be sure to check:

• the parties - are you dealing with an individual (which might be the case with a potential angel, employee or advisory board member) or with a corporation (which will usually be the case)?
• the purpose - this should be as specific as possible: is the other party using your secrets to evaluate a potential second round equity investment, to design a flux capacitor to interface with your Frobnicator 3K, or to provide an estimate for repainting the corporate ski-lodge?
• the date - you do need one. If the NDA will be signed after some initial disclosures have been made (better late than never), make sure it covers information that "might have been" as well as "may be" disclosed.

What to do after sending an NDA?

Follow up!

At a minimum you'll need to make sure it is returned with the right signatures and date. If the other side is reluctant to sign, or is casual about returning it, or sends it off to their legal department (or external lawyer) for review - well, that's useful information about the likely course of future negotiations. You, at least, will have shown yourselves to be serious and professional.

When it comes time to make the disclosures, you should prominently mark confidential materials "CONFIDENTIAL", and make use of read-only and password protected document formats. In most jurisdictions, trade secret protection is only available to those that have taken reasonable (and preferably documented) precautions to safeguard the confidentiality of those secrets.

Finally, make sure you ask for your documents (and any notes derived from them) to be returned or destroyed when the other party doesn't need your secrets any more (e.g. they've decided not to invest at this stage, or the quote has been tendered, or the component designed).

Download the handout for John Bates' and Jamie Mitchell's London Business School New Venture Development class (PDF)