It is a common practice for businesses to use non-disclosure agreements, often called NDAs, to protect their ideas and confidential information from being used by a potential customer, competitor or other outside party. Sometimes, an entrepreneur or business owner will want to share confidential information for a potential business transaction, joint venture, or other purpose. A non-disclosure agreement allows you to do this while protecting yourself against the outside party if they divulge your information to anyone else or make unauthorized use of it. Here are some common types of information a non-disclosure agreement may be used to protect:
- Systems and processes involved with manufacturing a product
- Recipes, algorithms, recipes, and formulas
- Contact lists
- Accounting and financial information
- New technologies
When and How to Use an NDA
Perhaps you are seeking new investment in your startup, or looking for a contract manufacturer to produce your product. You might use an NDA when you are going to disclose sensitive or confidential information to a potential customer, supplier, consultant, or other party that needs access to that information. You may ask an employee who will have access to confidential information to sign an NDA. Note, however, that if you are in the tech startup world and looking for venture capital or angel investors, they often will not agree to sign an NDA, due to the large number of companies approaching them.
The NDA should be a written agreement, that spells out the following, among other things:
- A definition of what information is to be protected
- A statement that information is not protected if already public, developed independently, or acquired outside the terms of the NDA
- What use the other party can and cannot make of the information
- How long the confidentiality obligation will last
- What remedies the disclosing party has for a breach or misuse of the other party’s obligations, usually an injunction, and possibly money damages
Sometimes an NDA is “unilateral”, meaning that one party is disclosing the information and the other is receiving it. Other times, an NDA may be “mutual”, meaning that each party is disclosing confidential information to the other, so the rights and obligations run both ways. Either way, the disclosing party wants to protect its sensitive information and make sure the party they are negotiating with or engaging will not steal it.
The Need for Legal Counsel
Whether you are asking another party to sign an NDA or they request that you sign theirs, it is critical to seek the advice of legal counsel. If you intend on sharing confidential information with a third party, a well-written NDA will use language that prevents them from disclosing, using, and sharing information. Furthermore, it may also outline how to protect and secure it.
Should you be willing to alter your NDA? These are the types of conversations you should have with your attorney. Before you change the terms of an NDA, you need to verify whether you are taking on too much risk to appease an investor who also intends to mitigate risk.
Spitz Legal Counsel, LLC
Spitz Legal Counsel, LLC advises clients on legal issues relating to starting, growing, and buying or selling a business. We draft and review contracts to protect you and your business. Each contract we create is customized to the business owner’s unique circumstances and needs. For more information about how we can help you manage your business confidently, contact Spitz Legal Counsel, LLC at (720) 575-0400 or by email at mark@spitzlegalcounsel.com. You can schedule a free initial consultation on our website, www.spitzlegalcounsel.com.