Innovation@work: When and How to Use Non-Disclosure Agreements
By: Kristin Mendoza
Growing a business requires constant communication and collaboration with others, whether they be individuals or other businesses. At these early stages, basic information is often quickly and easily exchanged without concern. However, as conversations deepen, it is common for the exchange of information to become more specific, even confidential, in order to better evaluate a business opportunity or relationship.
At this point, a business owner may start to think about putting a confidentiality agreement (sometimes called a non-disclosure agreement or NDA) into place. Since NDAs come in different varieties, here’s a quick primer on when and how to use NDAs in common business situations.
Interviewing for a New Hire
Consider having a standalone NDA executed when interviewing for:
- High level executive positions in cases where the company’s business strategies, financial position and technological information will need to be shared in order to evaluate the candidate’s skills and ability to execute on the company’s business plan
- Technical positions, such as software engineers, where the company will need to provide technical information about its products and/or service platform in order to evaluate the candidate’s technical knowledge and ability to work on the existing code
The form of NDA used in this context is referred to as a unilateral NDA. This means that the exchange of information is occurring in only one direction from the company (the discloser) to the candidate (the recipient).
Hiring Employees and Contractors
While not all open positions will require an NDA for interviewing candidates, confidentiality covenants for all employees and contractors who will have access to proprietary business information of your business, or belonging to your clients, should be considered at the time of hiring new employees or engaging new contractors. The form of NDA used in this context is also a unilateral NDA but often times will be coupled with other covenants, such as an obligation to disclose and assign rights to inventions developed during the course of employment and non-solicitation or non-competition agreements.
For strategic relationships with third parties (e.g., vendors, suppliers, potential customers, strategic partners or potential acquirers), where there is a likelihood that some combination of pricing information, manufacturing processes, customer lists, business strategy, marketing plans, financial history or other confidential or proprietary information may need to be disclosed by both parties in order to better evaluate a potential business relationship, an NDA should be signed by both parties prior to the exchange of such information. The form of NDA used in this context is referred to as a mutual NDA as the confidentiality obligation extends to both parties as disclosing and receiving parties.
Should the parties decide to move forward with a formal business relationship or transaction, the confidentiality provisions of the NDA will either be extended into the formal agreement by reference to the original NDA or be replaced by new confidentiality provisions in the transaction documents. Should one or both of the parties decide not to move forward with a formal relationship, then the standalone NDA remains in place through the term designated by the parties, and both parties will continue to be obligated to maintain confidentiality and will be subject to the restrictions on use of exchanged information as specified in the NDA.
The simple answer here is that most experienced angel investors and venture capitalist will refuse to sign an NDA at the time of a pitch or introductory meeting and will be rather annoyed if you ask them to do so. Their rationale for refusing is that they get pitched hundreds (or thousands) of investment opportunities and lots of the ideas behind the startups that are pitching to them overlap in terms of market analysis and opportunities, product design and go to market strategy, which makes it impossible for them to compartmentalize all the information that they are given. To them, a request like this indicates your inexperience in dealing with potential investors.
Given this, a good approach for the startup founder is to keep information contained in pitch decks that are shared with investors fairly high level. Most investors don’t need or want to see the intricacies of your product solution at the time of the initial pitch. Should the investor decide to explore an investment opportunity more deeply, confidentiality of business information can be addressed at the time that a term sheet is negotiated and before due diligence begins.
Regardless of which of the situations above gives rise to the use of an NDA, keep in mind that the best way to keep confidential information protected is to keep it secret and limit disclosure. NDAs set expectations about confidentiality, restrict access by the recipient and provide a process for addressing breaches of such information. However, even with an NDA in place, if the information finds its way into the public domain, there is no getting it back. For this reason, you always want to use caution when disclosing confidential or proprietary information and limit access both within your organization and outside of it to only those people who need to know such information in order to perform essential job or transactional functions.
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