-- a case for Non-Disclosure Agreements in business relationships!
Sharing your knowledge, or even thoughts, with anyone, no matter who or why, requires a high degree of mutual trust. As an entrepreneur or business owner, your biggest concern is protecting the sensitive and confidential information that keeps your business or company unique and competitive.
Whether it be protecting your idea or business plan, guarding intellectual property or trade secrets, or working with others to form a startup venture, in most cases, the solution could be a Non-Disclosure Agreement (NDA). NDAs are amongst the most common contracts in the modern corporate world.
When you want to start a new venture, or just want to keep any commercial discussions from reaching the public domain, you and your partners or co-founders will understandably like to protect or safeguard your “secret sauce”—the valuable information that makes your service or product unique, whether it is intellectual property, trade secrets or technical know-how.
This is especially true when the company is young and expanding; you and your co-founding partners will likely want to benefit from every protection in order to ensure that no one else implements the idea before you do. However, it is also true of businesses at any age – something you let someone know today could be used by them tomorrow without repercussion without the proper protection.
What is a Non-Disclosure Agreement?
In other words, a non-disclosure agreement is important in establishing a confidential relationship. Keep in mind that the party or parties that sign the agreement agree that confidential or sensitive information, such as technical drawings, they may obtain won’t be made available to any other parties.
For example, you might have come up with a unique product design and now need to receive a reasonable estimate from a manufacturer about how much the product will cost to make. In this case, an NDA can make sure that your business partner doesn’t pass details of your product idea to your competitors.
Did you know that some NDAs have a time limit while other NDAs are in effect indefinitely? Also, the NDA may state which damages an individual who breaches or violates the NDA is liable for as well as how any disputes and issues over the NDA should be settled.
There is no doubt that non-disclosure agreements are very common for companies and businesses entering into negotiations with other companies for a simple reason. These agreements allow both parties to share confidential or sensitive information without concern or fear that the information will end up in the competitors’ hands.
NDAs usually cover:
Ø Trade secrets, such as a formula, program, or process
Ø Technical designs and drawings
Ø Chemical and mathematical formulae
Ø Customer lists and prospect lists
Ø Business plans
Benefits of Non-Disclosure Agreements
As much as we would like to believe that everyone brings integrity to their work, keep in mind that it isn’t always the case. For example, having your partner or associate sign an NDA not only increases transparency and trust but also provides clarity for your partner.
One of the main benefits of an NDA is that confidential and sensitive information, such as trade secrets, regarding your company or business, is kept secret. This may include anything from research and development (R&D), finances, possible future patents, negotiations, and much more.
For example, software companies often use NDA agreements to legally bind their employees and various other third parties they work with, like business partners, contractors, and vendors, from disclosing or sharing crucial information related to the company’s proprietary information and IP assets about the company without prior authorization.
As you can see, the entire purpose or idea behind an NDA is to protect your information and ideas so you can launch your business without somebody else taking what you have done, completing it without you, and then claiming all of the profits or benefits for themselves.
When you speak with potential business partners, associates, and investors, they will like to know more about your business and operation in order to decide if they would like to do business with you.
This is where an NDA is important as it gives you a way to have these valuable conversations without the risk that you will give your secrets away to a potential competitor.
You can create NDAs at a low cost since they are just signed documents. As a result, this is one of the simplest and most cost-effective ways to maintain confidential and private information. Furthermore, NDAs are an excellent way to maintain trust and comfort in a business relationship.
When You should Use an NDA
You should use a non-disclosure agreement when you’ve information that you have to give to someone; however, you do not want them to pass that information or idea to anyone else. This may occur because:
1. You’ve created a prototype of a new widget. Note that before you decide whether or not to produce it, you will likely need to get a cost estimate from a good fabrication shop.
2. You would like to respond to a confidential and time-sensitive request for proposal from the government; however, no one in your company can draft the proposal. While you need to hire an outside party, you don't want them disclosing to your competitors what they learn.
3. You have come up with a new business model, and you would like to present it to venture capitalists for capital or funding, but you do not want them to take the idea and then develop it on their own.
4. Any time the data you're sharing could potentially be used to something other than your business's favor.
NDA Confidentiality Provision - Example
There is one common situation many startup companies face. Our client had an excellent idea and a prototype. They wanted to work with and partner with a big company in the industry. Let’s call these two entities Startup and BigCo. According to BigCo’s NDA, the disclosing party or entity would own any inventions, ideas, or information relating to confidential information or designs disclosed by it.
On the other hand, Startup has considerably less confidential information. It means that BigCo may purposely and intentionally disclose confidential information pertaining to Startup’s prototype and even claim ownership rights to the prototype.
This is problematic as it may destroy Startup’s business venture before it can even get going. So, you may be wondering how Startup can protect itself in this situation.
Here are a few possibilities:
Each party could agree only to disclose or reveal certain types of confidential information to the other, while all other confidential information that’s disclosed could be considered non-confidential.
Each party could agree to appoint a “gatekeeper,” an individual or entity that has the role of screening all confidential information, such as IP, that is disclosed by the other party. Keep in mind that information disclosed to the gatekeeper may still be confidential. However, ownership rights to the information would not flow unless the gatekeeper determined that it actually was worth it to disclose the information to the R&D team.
Who should execute an NDA?
All co-founders and associates should sign an NDA. This is because co-founders usually have a high degree of mutual trust, confidence, and respect at the start of their venture. However, it is worth noting that over time, things and circumstances can change, and relationships can sour.
A company must ensure that the individuals that have the most access to confidential and sensitive information be unable to disclose or reveal any of that information, such as designs, should they leave the company. So, if a company expects employees or staff to sign NDAs, it is only sensible for the co-founders to do the same.
Depending on the relationship you have with a strategic partner, it can be a good idea to have a non-disclosure agreement be a part of the relationship. Keep in mind that you should set realistic expectations around how your partner could potentially talk about your services or products and not disclose any confidential clients.
Even if the person you are sharing with is not your partner, they could conceivably take your idea out into the public domain. It's important to have an NDA in place for any employee that knows crucial information about your business and its success!
Third parties or Consultants
You might run your ideas by someone you trust or respect before or even after taking them to market. It's never a bad idea to ensure confidentiality in that relationship, even if you know the party or don't have a previous business relationship with them.
Entrepreneurs, like others, want the various benefits of an NDA. However, remember that it goes deeper than that. This is because for an entrepreneur, their business is their baby, and they have put everything into it. This is why entrepreneurs are highly protective of their business, information, and their ideas.
Given the importance of NDAs, the attention to detail required to get them right mustn’t be under-estimated. And disclosing commercially sensitive and confidential information to a third party, such as a potential partner, without an NDA is inherently risky, and you should avoid it. Once you sign an NDA, you’ve entered into a legally binding contract.
It is important as it allows you to share ideas and information with business partners while keeping them from passing it on to others. Non-disclosure agreements are not only low-cost but are simple to create binding legal documents between 2 or more parties that keep private information confidential.