When Should I Have an NDA?
You’ve worked hard building your business. You’ve created proprietary and valuable information (your company’s “secret sauce”) that keeps you ahead of the competition. You want to hold this information close to your heart, but sometimes you must share it with others when building your business.
So how do you protect your proprietary information—whether it’s customer lists, trade secrets, intellectual property, special processes, or computer technology—when you’re on a path of growth? How can you guarantee that business colleagues or potential business associates, such as vendors, suppliers, contractors, clients and the like will keep this information confidential?
Enter the non-disclosure agreement (NDA). NDAs are contracts that prevent the recipient from revealing or using for their own benefit any confidential information given to them by your company. However, NDAs aren’t simply form documents. They must be tailored to your specific circumstances and used in the right situations.
Let’s learn more.
What is an NDA?
An NDA is a contractual obligation where you and the other party to the NDA must not reveal any confidential or sensitive information learned from each other. NDAs are often referred to as confidentiality agreements. These agreements are standard in business and are especially important where the information you need to share is highly valuable to your company and gives you a competitive edge.
There are a few variations of NDAs. There are one-way (or unilateral) NDAs, where only one side of the business deal is obligated to protect and keep information confidential. There are also mutual, or two-way NDAs, where both you and the other party are obligated to protect and keep information confidential. Further, there are multi-party NDAs where the business transaction involves more than 2 parties or individuals. The key is ensuring that whomever receives your company’s valuable information is obligated to protect that information from inappropriate disclosure. Essentially, keep your secrets secret, and thus protect your company’s competitive position.
NDAs often protect the following type of information:
- Proprietary knowledge
- Client information, such as customer lists
- Strategic plans
- Pricing Information
- Trade secrets
- Patents or other intellectual property
- Business operations
- Innovative Technologies
NDAs are often negotiated between your company and your employees, your consultants and independent contractors, with certain suppliers/vendors and even when you sell your company.
An NDA protects your company, so other individuals or companies don’t financially benefit from your company’s hard work or cause your company to lose your “secret sauce.” If an NDA is breached, then your company may be able to sue the individual or company who violated the NDA for damages or get an order from the court preventing the individual or company from continuing to misuse your information.
Most NDAs include requirements that you must abide by in order for the information you share to actually be protected. These requirements usually involving marking information you share as “confidential” or “proprietary” and following up in writing what oral information you shared that is considered confidential and afforded the protection under the NDA. It’s extremely important to read and understand the terms of the NDA and follow its instructions. Otherwise, you will not have the protection you thought you had.
How Should I Negotiate the NDA’s Terms?
Your business goals should be your guide when negotiating the terms of an NDA. For example, if you want to sell or buy a business, your NDA will have different terms than an NDA that protects disclosure about your invention or intellectual property. Although some of the basic terms may be similar between these examples, you want to negotiate a definition of confidentiality that is particular to your business, anything that is not to be considered confidential, how long the NDA lasts, and how long the sensitive information will be protected.
Although many elements of an NDA deserve your attention, how long sensitive information will be protected is a key element that you should carefully consider. It’s really important to put thought into your NDA to capture the value and purpose of each confidential relationship. For example, if the value of your confidential information that you wish to protect extends out ten years, why put a one-year obligation of confidentiality clause in your NDA? Or if you include everything and the kitchen sink in your confidentiality clause, you’ve run the risk that the entire provision will be thrown out by a judge for being overbroad. One way to think about it is how long will that information you share with the other party have value to your company? When will an unauthorized disclosure of that information not cause your company any harm?
Putting strategic thought into your NDA is critical to protecting your company’s secrets—and your hard work.
Let’s look at two situations that raise unique NDA issues.
What if I Want to Sell or License a Product?
If you plan to sell or license a product you developed, you’ll want to negotiate an NDA with the potential buyer or licensee. You don’t want the potential buyer or licensee using your information to their benefit—financial or otherwise—during the negotiations. Even if the sale or license doesn’t go through, that’s fine. You’ve protected yourself from any disclosure of your product’s information, especially to a competitor.
What if I Want to Engage with a Potential Strategic Partner?
No business operates in a vacuum. It’s quite common to work with other companies for each other’s mutual benefit. Often times, in order to determine whether there are mutual goals and synergies, you have to reveal confidential information to one another. It’s important to have an NDA in place before you have substantive discussions. If you don’t have an NDA, then any confidential information you share is unprotected. So, a company would likely be free to use the information they learn from you for their own purposes and benefit. It also makes it much more difficult to protect that information going forward.
What if I Want to Sell My Business?
If you want to sell your business, you must open your kimono—that’s right, you’ve got to show everything to your potential buyer. This includes, among other things, your financials, your operations, your marketing, your client lists, and your intellectual property.
Before you start sharing your business’s life story, make sure you have an NDA in place with the appropriate parties. Again, you want to protect yourself in case the deal falls apart or if the potential buyer is more curious rather than serious about buying your business.
Given business pressures, the temptation to be broad or to use a form document to satisfy the need for an NDA exists. It’s just another contract, right? A formality that must be completed before we get to the deal? No. An NDA could make or break your business. Make sure that it applies to your transaction, your business, and your industry. Make sure your terms are tight-knit, and all relevant parties are included. You’ve worked too hard to have someone else use or share your secrets.
If you have questions on when an NDA should be used in your business, I welcome you to contact me.