By Christina Meng, Esq.
Intellectual property is often the most valuable asset that a startup has when it is formed. Effectively protecting a startup’s business ideas is critical. When drafted properly, a non-disclosure agreement, or “NDA,” can protect a company’s client lists, pricing information, and other key business intelligence.
At minimum, an NDA will have:
- The names of the parties
- The reason for the NDA (what are the parties planning to do together)
- What information will be considered confidential, and what will not
- An expiration date
To harness the benefits of an NDA, it is important for startups to invest some extra time and care in examining the contractual terms. A founder logically wants to balance the obvious need to get customers or land big vendors with the long-term goal of protecting the company’s intellectual property.
Before signing an NDA, startups should carefully read the NDA to make sure the founders understand what will be protected. NDAs sometimes include tricky provisions covering employee poaching and residual knowledge, so not every NDA is “boilerplate.”
Structurally, NDAs can be one-way or mutual. A one-way NDA allows the disclosing company to unilaterally keep the other party from sharing confidential information. A mutual NDA would keep both parties from sharing confidential information with unauthorized parties. While the choice of structure should be evaluated to suit business needs, many companies will find that it is far easier to propose a mutual NDA, since this structure provides more comfort to the party getting the mutual NDA that they will be treated fairly.
While NDAs can be essential in protecting a startup, they should not be overused. As a general rule of thumb, NDAs should be considered whenever the company is in negotiation with a client, vendor, or individual investor that has the opportunity to “borrow” or leverage the company’s information. With vendors such as lawyers, accountants, and bankers, NDAs are usually not necessary since there is usually little risk that they will be interested in taking the company’s business ideas. Additionally, it is worthy to note that venture capitalists generally never sign NDAs. This is because NDAs interfere with a venture capitalist’s ability to invest in similar businesses in the same industry, a freedom that they are unlikely to give up.
Regardless of industry, NDAs can be useful tools to protect a company’s essential business information. The power of the NDA, however, largely depends on thorough drafting and thoughtful planning.