Start-up companies often own only intellectual property such as ideas, business plans, patents, and trade secrets. Some are further along with prototypes or beta models developed that are not ready for meaningful sales. To bring products to market—whether in the developmental stage or in the sales process—start-up companies need to protect their confidential information when dealing with third party vendors, developers, and everyone else in their ecosystem who are not otherwise bound to confidentiality. (e.g., attorneys are bound by attorney-client privilege)
To do so, companies routinely enter into Nondisclosure or Confidentiality agreements—often called NDAs. Simply put, an NDA is a contract whereby (1) one party agrees to disclose otherwise confidential information; and (2) the other party, in return, agrees to refrain from further disclosing that confidential information to others. Unfortunately, there is nothing else simple about NDAs.
In their excitement and eagerness to proceed, many start-ups rush to sign NDAs without thinking about their ramifications. Here are some key guidelines to follow before entering into a NDA.
DO
- Limit the scope of your NDA to evaluation of the disclosed materials for the possibility of entering into subsequent agreement. An NDA should not create business obligations between the parties nor permit the receiving party to use your confidential materials to create products for itself. Nor should any licensor/licensee relationship be created.
- Identify with specificity the information or materials that require protecting. Bear in mind that the receiving party will want to avoid being restricted in its own current or future development efforts without the fear of future litigation resulting from the NDA.
- Remember that the parties can enter into new confidentiality agreements if additional information needs to be disclosed. Likewise, if the companies enter into a business deal, then the parties can negotiate the confidentiality (and other) provisions at that time.
- Specify how information will be labeled confidential upon provision to the recipient. Likewise, the agreement should cover how oral communications concerning confidential information will be treated under the NDA.
- Indemnify the start-up should the receiving party disclose any or all of the confidential information. After all, the confidential information is your business’ primary, if not only, asset. By the same token, be sure that the NDA states how and where the start-up company can exercise its right to recovery.
- Make sure you receive a signed, executed copy from the receiving party.
DON’T
- Believe you are bound by any oral agreements. The parties are only bound by what they signed in most instances pursuant to the terms of the NDA.
- Show the proposed receiving party anything until there is a signed agreement in place.
- Sign any agreement that assigns any of your company’s rights beyond the right to evaluate the confidential information.
- Agree to any provision that permits the receiving party to use your ideas or states that anything not marked “Confidential” is automatically considered to be non-confidential and, thus, unprotected.
- Disclose more than you need to disclose. After all, the less that is disclosed, the less that can be stolen from you or otherwise disclosed by the recipient in violation of the NDA.
- Get your hopes up too high. The signing of an NDA does not mean that the parties will enter into a business relationship. Likewise, the receiving company may already have the same or similar idea through internal or external efforts. ❒
