Non-Disclosure Agreements (NDA)
A non-disclosure agreement is an essential part of setting up a new entity, or obtaining financing and advice. Essentially, a non-disclosure agreement is designed to protect your data and ideas from unauthorized use by outside parties, such as venture capital, advisors, or employees. Without the non-disclosure agreement, outside parties my find it a simple matter to take what you’ve developed, and freely use it.
There are two types of non-disclosure agreement:
- Unilateral (one-way) NDA
- Bilateral (Mutual, two-way) NDA
Unilateral NDA is one where one party needs to remain secret where the other party can disclose information provided. One way to look at a Unilateral NDA is: "I want to disclose information to you, but I want you to keep it secret. But, whatever you tell me, I don't have to keep secret."
Mutual NDA (or Bilateral NDA) is where both parties will keep each other's disclosed information secret. Mutual NDA usually makes the terms of the document more equitable for both parties.
Each types of NDA has its own place. An Unilateral NDA is suitable in a vendor/client situation, whereas a merger/acquisition would require a Mutual NDA.
The Anatomy of an NDA:
- WHO: Which parties are involved and their contact information
- WHAT: what should be considered confidential
- HOW LONG: the length of time to keep things secret (usually either two or three years, but can be longer or shorter)
- WHAT TO DO AFTER: what to do with confidential materials after they have been used or if the NDA has expired (usually, destroy or return the materials to the provider)
- NO OBLIGATION: The NDA doesn't mean that the two parties are in any business arrangement. It is solely for the passing of secret information only
- REMEDY: What do to if someone violates the NDA and it causes harm to the other party (usually some kind of monetary remuneration)
- WHERE: The jurisdiction governing the parties (if someone decides to take legal action against this NDA, which state should the proceedings be held)
There may be other clauses depending on the type of business, the type of information, or anything else that the parties would like to include in this document.
The non-disclosure agreement should be signed by both the entrepreneur and the outside party before any proprietary information, whether pro forma financials, intellectual properties, or other information is released, and should specify the uses that may be made of it, and how such information should be returned. A well drafted agreement may also provide for liquidated and other damages in the event of breech, and clearly state that any of the information covered remains the property of you and your enterprise. It should include language prohibiting any further sharing of the information to other parties without prior written permission.
The non-disclosure agreement is a contract, and because of the far-reaching impact it may have, should be carefully drafted by a business or intellectual property lawyer to assure that it has everything needed to make it binding and effective.
It should be mentioned that many investors don't like to sign NDAs. One reason is that investors may come across many similar ideas and they prefer to avoid listening to a pitch than to sign something that may prevent them for making a future deal.