This is a guest post by Tom Stasi, Associate at Taft Law
Most entrepreneurs understand that their company’s main value is derived from its intellectual property, whether it be an algorithm, trade secret, etc., but it may be less obvious as to how to keep that information confidential.
When engaging or collaborating with third parties, it is common for an entrepreneur to be presented with someone’s “standard” template confidentiality agreement or nondisclosure agreement (NDA). Many simply sign without a second thought, but do you know what you are signing? Here are five points to keep in mind.
1. Pick a structure.
NDAs typically come in one of two forms: a one-way NDA or a mutual NDA.
A one-way NDA binds the receiving party to protect the confidential information disclosed in the engagement. For example, if your company is entering into a contract with a professional who will have access to confidential information of your business, like a software developer, then you many want to require them to sign a one way NDA or at least include a confidentiality provision in your business agreement.
In contrast, a mutual NDA or a two-way NDA is more appropriate for business engagements where both parties plan to disclose confidential information. For example, if your company is seeking to collaborate with a strategic partner, they may insist on signing a mutual NDA. These are often easier to negotiate since both parties are bound by the same restrictions.
2. Lips sealed; Hands tied.
Be aware of the restrictions in your NDA. In general, there are two important restrictions to consider: non-disclosure and non-use.
A non-disclosure provision prevents the receiving party from disclosing the disclosing party’s confidential information to third parties. A non-use provision limits the receiving party to using the disclosed confidential information for a specified purpose.
An NDA may not necessarily include a non-use provision, so you should ensure this restriction is included, especially if your company is collaborating with a potential competitor. Otherwise, the other party will be permitted to use your confidential information for its own purposes, even though it cannot disclose it to third parties.
3. Check for Easter eggs.
Not all NDAs are created equal so make sure there are no surprises before you sign another party’s “standard” agreement. For example, certain NDAs may include an assignment of IP whereby any IP that is developed from the parties’ collaboration will be co-owned by both parties. This could be very damaging to your company if you unintentionally surrendered ownership rights to a new proprietary product of your business.
Additionally, keep an eye out for non-competition and non-solicitation clauses. Agreeing to such restrictions may cause unintended limitations on your business operations. In sum, you may be entering into an agreement that restricts your business or surrenders your rights more than you expected, so be sure to read the entire agreement and/or have your attorney review it before signing.
4. Don’t be that company.
Know when it is appropriate to offer an NDA. Introducing an NDA to the wrong party or in the wrong context can cause your company to lose credibility.
For example, venture capitalists are unlikely to sign an NDA and introducing the concept may reveal your company’s inexperience. General business advisors or mentors may also be turned off by such a request.
If you are unsure of the appropriateness of an NDA in a particular context, then make sure to vet it with an attorney or another trusted advisor who has experience in similar situations.
5. Take care of your puppy.
Lastly, remember to factor in the cost of enforcement when calculating the overall value of an NDA. Entering into an NDA is a little like bringing a puppy home for the first time. In the beginning, you enjoy having it but then it starts to tear up your house, and you realize it costs money to maintain.
Similarly, signing an NDA is important in setting the tone with a party that you are engaging, but it requires a lawyer and eventually an expensive lawsuit to enforce it if the terms are violated.
As a startup, your budget probably does not have adequate capital reserved for legal battles over a breached NDA, so be sure to consider that when weighing the cost of disclosing confidential information to another party.
Tom is an associate in Taft’s Business and Finance group. He assists both private and public companies with a variety of corporate transcations, including M&A and offerings of securities. He also conusels start-up companies through all stages of business development, including formation, seed funding, venture capital and exit transcations. Connect with Tom on LinkedIn
Feature image credit Dennis Skley. Image has been cropped.