An Intro to Non-Disclosure Agreements
While perfecting your new business plan and starting a business, you’ll need help. And along the way, you’ll need to share your secret sauce with people outside of your inner circle. When you do, you should consider using non-disclosure agreements (NDAs) to protect your confidential information.
In this post we’ll look at five things you should consider when working with NDAs.
1. MUTUAL OR UNILATERAL
There are two types of NDAs:
- In a unilateral NDA, only one party is agreeing to protect the other party’s confidential information.
- In a mutual NDA, both parties are agreeing to protect the other party’s confidentiality.
Which type you use is dictated by the circumstances of the deal. For starters, if only one party is disclosing confidential information, a unilateral NDA is probably appropriate. However, if both sides are disclosing their confidential information, then a mutual NDA may make more sense. But you should note that you may not always be able to get a mutual NDA. For example, some larger companies refuse to sign NDAs with smaller companies simply to reduce their risk.
2. “CONFIDENTIAL INFORMATION” DEFINED
Almost every NDA will include a definition of what is, and is not, “confidential.” Sometimes it will be very explicit and include a large list of items. Other times it will be simplified to something along the lines of anything that a “reasonable person would deem confidential.”
In either event, you need to ensure you know what is going to be considered confidential. And further, you should consider whether you need any exceptions to the definition (for example, information that may have been confidential at one point but later becomes publicly known).
3. RESTRICTIVE OBLIGATIONS
The next thing to consider is what the recipient is actually prohibited from doing. Depending on the complexity of your NDA, you may see one to three common restrictions:
- The recipient may be required to use commercially reasonable efforts to protect the confidential information they receive under the NDA.
- The recipient may be prohibited from disclosing the confidential information to third parties.
- The recipient may be prohibited from using the confidential information for any reason not authorized under the NDA.
However, you should also consider whether there should be exceptions to those restrictions. For example, you may want permission to disclose the confidential information to third parties (but only if it is in the ordinary course of your business and only if they agree to protect the information in a similar NDA).
There are various approaches to the duration of NDAs. Some NDAs will be perpetual in length, but more commonly you’ll find some pre-defined term. Often between one to ten years (five may be the most common).
The length may depend on the nature of the relationship. If you are just exploring a potential relationship, it might be five years from the day you sign the NDA. However, if you are going to be working with someone for a few years, it might be the length of the relationship plus five years. Further, consider adding a statement that the NDA should not be used to reduce any obligations a party may owe the other party under applicable trade secret laws (which exist separate from the contractual obligations under the NDA).
5. “HIDDEN” TERMS
And last, but certainly not least, always consider if there are additional terms that might be “hidden” in the NDA. For example, in a stand-alone NDA (one that exists separate from other service-related agreements), the NDA probably shouldn’t transfer ownership of IP or grant a license to IP. And it probably shouldn’t include non-competes, non-solicitations, and the like. If you need those provisions, then you probably need more than just an NDA.
DON’T STOP HERE!
In addition to legal topics, you have a lot of ground to cover when starting a new business. To help, you can enroll in the Kauffman Foundation’s free FastTrac program at www.fasttrac.org.