Whether launching a startup, looking for a co-founder or seeking finance, there is a good chance you’ll have to discuss commercially sensitive information with someone outside your business with the risk of that information leaking into places you don’t want it to go.
This scenario raises the issue of when and if you should ask the recipient to sign a confidentiality or non-disclosure agreement (“NDA”).
The kind of information that can cause a confidentiality concern includes the launch of a new business or product, client information, development of market-changing software, unique processes, or even the sales and marketing strategy.
In theory, an NDA provides you with a legally enforceable contract of confidentiality between the person disclosing and the person/company receiving the information.
They are a regular feature of the business world but can sometimes be applied overzealously and become a blockage to otherwise positive conversations.
In reality, when should an NDA be used and how effective is it? For example, is it crucial to get a potential investor to sign an NDA or might it hinder your ability to raise money from some?
Here Are 6 Points To Consider When Drafting And Using A Confidentiality Agreement:
1. What’s The Reality Of Any Leakage Happening And/Or Being Damaging?
Is the information you’re disclosing really confidential? Is it in the recipient’s interests to start disclosing that information? What is the genuine level of risk and, by applying it too overtly, might you lose an opportunity?
2. It’s The Execution Of The Idea, Not The Idea Itself
Too many startups feel overly protective of their ideas or initiatives and start to impose NDAs in every circumstance. But remember, it’s the team and the execution that really matter, and the recipient can’t copy that. For a lighter perspective on the NDA conundrum have a look at the marvellous team from vooza.com in their video “Sign the NDA”.
3. Extend The Elevator Pitch & Deliver Your Key Messages Without An NDA
If genuinely worried, can you explain your way around the commercially sensitive stuff and still get the key messages across? Can you sell the vision without needing to give away any trade secrets?
4. Might You Be Creating A Sense Of Mistrust?
Many VCs, business angels, and freelancers will be instinctively resistant to signing NDAs and might view it as a sign of mistrust. Many of them work within a world where their reputation relies on the maintenance of confidentiality and doesn’t require every discussion to be wrapped up by NDAs. By insisting you do so, what signals does that send out?
5. What About Enforcement?
NDAs can be difficult to enforce – particularly if poorly drafted – so your insistence on that NDA being signed might create an additional headache, with the expense and time required to enforce it.
“A non-disclosure agreement is only enforceable if it is signed by you and the other party, therefore it is crucial that it is signed before you share any confidential information. If you are seeking to protect the information of both parties.”
– David Bushby, Australian senator
In many situations where an NDA needs to be enforced, the costs far outweigh the benefits.
This is not to say that for the particularly sensitive commercial information you should ignore the NDA, but remember enforcement could be its ultimate use. If you need an NDA, make sure it’s well drafted and the task of enforcement is made as easy and clear-cut as possible.
6. Conclusion: When & Where It’s Most Needed
Certain issues do require and deserve an NDA, the majority do not. Embryonic conversations and mutual opportunities can be stifled and lost due to an overly eager insistence on the NDA.
But when one is required, a poorly drafted document will fail to deliver happiness when the time comes to enforce.
Think seriously before imposing an NDA onto a conversation with a funder, developer, or co-founder. If you decide you need one, make sure it’s well drafted by an experienced lawyer who knows where the potential loopholes are.
If you have any questions regarding confidentiality agreements or you need this document drafted, book a call with our legal team!