January 12, 2013
Potential investors love to malign nondisclosure agreements (NDAs). And why shouldn't they? They want to talk to many entrepreneurs without restriction on conversation topics.
But on this point the investor's interests are not the same as the innovator's. The innovator has one set of important information he or she wants to keep confidential. The shopping investor will not experience the same sense of propriety.
So before you buy into the mindset that NDAs are always bad for the startup ecosystem, consider the following five reasons you may want to use an NDA in certain discussions:
- Your discussions turn from “what” to “how.” The party sharing information needs to protect its trade secrets. But a company can say a lot without giving anything away. If one is not disclosing trade secrets, there's a better chance that sharing is not all that risky. So a good rule of thumb is to ask whether you are discussing “what” your enterprise does, or whether the talks are about “how” or “with whom” you're doing it. To the extent you are talking about “how” or “with whom,” an NDA is a smart choice.
- You are dealing with someone other than an investor. Investors have good reasons for balking at NDAs. And you'll be better off (and stand a better chance of being funded) by not asking for one when it is not necessary. But there are plenty of times you'll need to disclose sensitive information to other collaborators both inside and outside of the company. There is little reason why a vendor or independent contractor developer should refuse to sign a reasonable NDA. If they resist, try your best to see whether there are unseen motives that could harm your interests if you move forward with that party. And it should be a nonissue that your employees and other staff must sign a properly drafted NDA with a reasonable scope.
- You have made substantial investment in your innovation. Why risk accidentally donating your hard work and money to the public domain?
- You will be sharing documents or data. When you provide tangible information to another party, you place yourself at greater risk of having that information extrapolated from, copied, reworked, or otherwise used in ways you may not want. Placing agreed-upon restrictions on these materials reduces this risk.
- You want to save on legal fees. The main way to remedy the unauthorized disclosure of information is to go to court. And litigation is expensive. The dockets and law books are full of situations where companies were lax in protecting their proprietary information, whether because of oversight or because of a false sense that the information would be protected. Companies that win in court may at the same time lose in terms of the resources they could have spent otherwise had they adequately considered the proper restrictions on disclosure.
You do not need to ask everyone you talk to about your projects to sign an NDA. That actually would stifle innovation and would keep legitimate opportunities from finding you. But if you keep these reasons in mind, you may find that your situation actually does need an NDA.
Guest author Evan Brown is senior counsel with InfoLawGroup LLP in Chicago, helping businesses make good decisions about technology and intellectual property. He also writes the internetcases blog. Follow him on Twitter @internetcases.
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