If you deal with vital intellectual property in your business, you know you need to protect it through legal means by copyrighting, patenting, and trademarking it. But what if you need to share some of your proprietary information with another party? One way to protect confidentiality is through a non-disclosure agreement, typically referred to as an NDA.
When You Need an NDA
It would be nice to believe that you could reveal confidential intellectual property without worries that your ideas might be stolen, but unfortunately, that’s not the way the world works. Because of this you should consider an NDA whenever you’re presenting a new business idea, product, technological advance, or invention to a potential partner or investor. Marketing and financial information should also be held close to the vest, so NDAs are appropriate when disclosing them, as you might to someone interested in buying your company. Venture capitalists, however, are typically reluctant to sign NDAs of any kind.
You may also want to ask certain employees to sign NDAs if they have access to sensitive information regarding your products or finances. Those NDAs could prove a great relief if those employees leave your company to work for a competitor.
What Your NDA Should Cover
Because an NDA is a legal contract, certain elements are standard or legally required (the parties to the contract, for instance), while others make practical sense should the NDA need to be enforced in the future. Your NDA should include these key elements:
- Clear identification of the parties to the NDA
- What information is being held confidential (including information conveyed in writing and orally)
- A ban on the party receiving the confidential information sharing it with anyone else or using the information personally
- The term of the NDA
- Any circumstances rendering the NDA void (including your disclosing the confidential information publicly)
Your NDA should also list any exclusions from confidentiality, including:
- Any information that’s already been made public
- Any information the receiving party already knows before signing the NDA
- Any information made public by people not party to the NDA
Loopholes to Avoid in Your NDA
You’ve probably seen news reports that discuss courts setting aside NDAs for various reasons. You certainly don’t want to be the subject of one of those news stories, so you need to take care to avoid possible loopholes in your NDA. These might include:
- Failure to mark the information itself as confidential. If you fail to do this, the receiving party might be able to argue that the relevant information wasn’t actually covered by the NDA.
- Failure to specify how disputes regarding the NDA will be handled. If you don’t include a mediation or arbitration clause, you could find yourself in court unwillingly. Make sure your NDA also complies with all the requirements of the various states in which you need it.
- Failure to keep multiple copies, including electronic signed copies. You don’t want the receiving party to "lose" their copy and be able to claim the agreement didn’t exist.
- Failure to limit the scope of what’s included. Courts are far more likely to overturn an NDA that’s very broad in its scope. Don’t try to cover every conversation you’ve ever had with the receiving party, but be very specific about the confidential information covered by the NDA, and draw up multiple NDAs if needed.
An NDA can be a crucial document when you need to protect confidential information from public disclosure. Insisting on an NDA protects the trade secrets of your business now and into the future.