As an entrepreneur, your business idea is your most prized possession. When you form your entity and start conducting business, your technical know-how, marketing and growth strategy, R&D and company processes also become part of the gamut of things you want to keep under lock and key. But as your company grows, you may become increasingly involved with third parties with whom you must share some of this information.
Confidentiality Agreements 101
Confidentiality agreements, also commonly known as Non-Disclosure Agreements (“NDA”), obligate the recipient of sensitive information to keep it confidential. If a disclosure or other misuse of the information occurs, you can sue for breach of contract and receive damages.
While an NDA is among the most common legal precautions that small business owners take nowadays, it is also subject to the most casual attitude. Business owners who underestimate the complexity of an NDA are often tempted to use standard “off-the-rack” confidentiality agreements. This can cause companies to bind themselves to ill-contemplated obligations, and consequently leads to unknowing breaches of those obligations. Below is a more in-depth explanation of NDAs and why you shouldn’t take them lightly.
Who are the Parties?
A confidentiality agreement can be mutual, where both parties promise to keep the other party’s information secret, or unilateral, where only one party has obligations to maintain confidentiality. The latter is more suitable where only one party is disclosing sensitive information (for example, the seller in a purchase transaction). The receiver may also promise to share the terms and conditions of the NDA with anyone it shares information with, such as employees, partners, attorneys, subcontractors or affiliates. It is important, therefore, to carefully assess your requirements and the particular situation before you enter into an NDA.
When do we sign?
Timing is everything! A corollary of the casual attitude towards confidentiality agreements is that business owners often wait for discussions to take a more “serious” tone before signing an NDA. This could be, and often is, too late in the game.
Here’s why: if you don’t have an NDA, anything you say, even in preliminary or casual discussions, is vulnerable to disclosure. Bear in mind this applies not only to third parties, but also to early stage discussions amongst co-founders and employees. The last thing you want is your co-founder stealing an idea you came up with during a brainstorming session. You can stay one step ahead by having an NDA in place before ANY disclosures take place.
What do I want to keep secret?
The definition of “confidential information” is perhaps the trickiest part of a confidentiality agreement and often the most negotiated. While the discloser wants it to include practically all communication (and then some), the receiver wants to keep the definition as narrow as possible, so as to limit its obligations.
It is difficult to draft an accurate definition: a more generalized definition is vague and leads to disputes between the parties, whereas a highly specialized one is inflexible and could defeat the purpose. While your attorney will work with you to come up with a comprehensive definition tailored to your need, here are a few things to think about:
- The forms of communication (written, oral and electronic);
- Keeping the fact of the deal itself confidential, restricting the other party from revealing that it’s engaging in discussions with you in the entirety; and
- Extending the obligation of confidentiality to derivative works (promotional material, reports etc.).
What is usually excluded?
While negotiating a confidentiality agreement, it is likely that the receiver of information will want to specify certain exclusions that will not qualify as breaches of the agreement should they use or disclose the information. This includes information that is already public knowledge (for example, SEC filings or the subject of a news article), information that later becomes public knowledge and disclosures required by law or by court order. In addition, information acquired from third parties can also be exclude
More pertinent to tech startups, the receiver might negotiate exclusions for developing independent products or ideas, which may overlap with or be connected to the information shared. As the discloser, in turn, you can negotiate that the receiver will bear the burden of proving that these developments are, in fact, entirely independent from the confidential information.
What other obligations does an NDA include?
By having someone sign a confidentiality agreement, you are essentially creating a binding contractual obligation for the receiver of the information to keep it secret. Depending on the purpose, some NDAs may have a specific term. This is because information becomes harder to protect with the passage of time. To protect yourself further, you may insist that the information be stored on computers with certain security measures, or that documents can only be accessed electronically, or may not be removed from the premises. You can also require the receiver to destroy information after use.
Whether you are in your pre-incorporation idea-generation stage, post-incorporation protection of IP and trade secrets, or the final stages of selling your company, it is important to protect yourself and your company with NDAs. A Priori lawyer will help you navigate the sensitivities of your situation and work with you to generate a Confidentiality agreement that works for you.