4 min. read
An NDA is a contract that prohibits a party from disclosing confidential information or using it for their own benefit. They can be particularly important for startups, whose success usually turns on the brilliance of their trade secrets and innovative ideas. To avoid seeing their intellectual property arrive in the hands of a competitor, startups can protect themselves by using NDAs.
Unilateral NDA vs Mutual NDA
A unilateral NDA is used when only one party is revealing confidential information to another, whereas a mutual NDA is used if several parties share information with each other.
Unilateral NDAs are typically used between employers and employees, investors and startups and companies and consultants. Mutual NDAs are usually used for mergers, franchise agreements, and joint venture negotiations.
Key Components of an NDA
- In writing
- Names of parties involved
- Clear and precise description of the confidential information
Vague NDAs are unlikely to be enforced by courts. A general description may create confusion about what information exactly is covered in court. If using a very specific approach, then it may be necessary to add additional confidential information as one party becomes exposed to it.
Therefore, it is imperative to explicitly state a definition of confidential information within the NDA, as well as a provision stating that the information in question remains the property of the disclosing party.
- The duration of the agreement
While an NDA that is properly drafted can carry on indefinitely, most NDAs typically last between 2 and 5 years. The NDA must be deemed reasonable. If the NDA prevents a party from working their profession or trade, then the NDA will qualify as a non-compete agreement (NCA), which are more difficult to enforce in California due to their prohibitive nature.
Types of Confidential Information
Information that typically CAN be covered by an NDA:
Classic examples include recipes, chemical formulas, non-patented inventions, lines of code, client or customer lists, pricing arrangements, product designs, business plans, client lists, etc.
An NDA cannot expand the definition of a trade secret, which is set by law and not contract.
Information that CANNOT be covered by an NDA:
Anything that has already entered into the public domain will not be protected by an NDA, including information that is revealed during conferences, networking events, or panel discussions.
NDAs also cannot be used to prevent a party from revealing illegal activity.
Who Should Sign an NDA?
- Co-Founders
Unfortunately, sometimes the relationship between co-founders goes awry. An NDA can protect the company in such an event, which is particularly important since the co-founders have the greatest access and understanding of a startup’s intellectual property.
- Employees, Consultants and Potential Employees
NDAs are not necessary if employment contracts already contain robust confidentiality clauses. In the absence of such clauses, however, it is a good idea to ask high-level employees such as engineers to sign NDAs.
Interviewing candidates who are being considered for high-level managerial positions and who are being exposed in that vein to company secrets should be asked to sign an NDA.
- Partners and Suppliers
If the startup outsources certain sensitive aspects of its business to vendors or works closely with a partner company, then NDAs are in order.
- Potential investors
VCs and angel investors do not sign NDAs while considering pitch decks because they are typically looking at a plethora of different pitches and do not want to expose themselves to liability. It’s, therefore, important to balance providing a credible pitch without revealing trade secrets.
Solutions at this stage of the process consist of using a virtual data room, which will password-protect sensitive documents when discussing the business with investors, focusing on what your startup does without unveiling how it does it and otherwise relying on patents or copyrights to protect your intellectual property.
