When discussing private information in a small firm, a non-disclosure agreement, often known as an NDA, is becoming increasingly prevalent.
NDAs, or nondisclosure agreements, are used to safeguard sensitive information such as trade secrets, fresh ideas, company strategies, and other economically sensitive information.
An NDA’s purpose is to prevent unauthorised use of specific private information.
NDAs are a valuable tool for establishing limits in new business connections, letting you to specify exactly what information you will give, how it will be used, and with whom it will be shared.
In what circumstances is an NDA appropriate?
When you need to safeguard information that is important to your business, you should utilise an NDA.
When considering if an NDA is necessary, consider the following:
Is the information ‘secret’ in the first place?
The information is not secret if it is generally known or publicly available.
Is it appropriate to share the information?
You don’t always need to divulge business-critical information at initial encounters, informal discussions, or sales pitches.
Keep the early talks to necessary facts that will not jeopardise your business if found by outside parties.
Once things have progressed beyond the initial chat, you may want to consider employing an NDA.
Could sharing this information widely cause harm to my business?
If the response is yes (or perhaps), offer an NDA before further with the conversations.
When deciding whether to utilise an NDA, consider the possible business connection, how much you trust the other party, the importance of the material being exchanged, and the consequences of it being released without your agreement.
How important are NDAs for protecting my growing business?
The easiest approach to keep your information private is to not release it at all. However, this is impractical if you want to share your ideas with potential business partners, suppliers, or investors to help your company expand.
If you don’t have an NDA, and your sensitive information is revealed without your consent, you may rely on the common law “breach of confidence” which applies to material which has a “necessary character of confidence” given “under circumstances imposing an obligation of confidence”. However, satisfying these standards might be challenging, and you will likely need to hire attorneys to enforce them.
A well-written NDA is more secure. This should eliminate any dispute about whether the receiver was aware that the material was secret, and it may provide you with legal recourse if an unauthorised disclosure occurs.
NDAs alone are rarely enough
However, NDAs are rarely sufficient on their own, and they function best as part of a larger plan to secure your company’s assets.
While NDAs can assist in holding a “rogue leaker” responsible, they are unlikely to undo the damage done by the revelation. Once someone has divulged your secret recipe, it can no longer be kept private. It is critical to control your disclosure techniques as well as have a thoroughly worded NDA in place. Consider employing data rooms, watermarks, and encryption, and make sure you have the option to restrict access to previously exposed materials. If you are having a face-to-face encounter, you may want to limit yourself to giving tangible, hard copy materials (as long as you collect them at the end of the meeting).
Could I harm negotiations by using an NDA?
NDAs are fairly frequent in business, and many companies are familiar with them. They demonstrate that you are serious about protecting your company and serve to reinforce the idea that what you are sharing is confidential.
They can, however, constitute uncomfortable “red tape” if introduced at the wrong moment. When addressing investors, this is a fantastic example. Many investors explore many projects at once and frequently refuse to sign NDAs so that they are not prevented from making further investments. This is standard market practise.
Finding the appropriate balance is the key to safeguarding your business without jeopardising discussions.
During the early conversations, investors or other partners want to acquire a sense of your proposal and whether or not you can reach your goals. When discussing NDAs, the term “sharing the cookie, not the recipe” is widely used and should be remembered. You should try to market your company concept without exposing too much so that it may be replicated.
Once you’ve discovered someone willing to commit to your company, you might consider employing an NDA before releasing additional sensitive information. However, keep in mind that confidentiality restrictions are frequently incorporated in a term sheet or investment agreement, so your NDA may not be required in these cases.
What terms should I include in an NDA?
A well-drafted NDA will include the following:
- Definition of confidential information: this is another careful balancing act. You must ensure this is broad enough to cover everything you want to keep secret. However, this definition can only apply to truly confidential information, as once the material loses the quality of confidence (such as becoming publicly available), the NDA is unlikely to be enforceable
- Permitted purpose: clearly specify the purpose for which the recipient may use your confidential information.
- Disclosure: clearly define who the recipient can share the information with (usually employees, consultants and advisers such as lawyers) or you may wish to provide a list of specific individuals who can receive the information (and these people should also be bound by confidentiality obligations)
- Duration: how long will the NDA apply? This must be realistic otherwise the NDA may be unenforceable (and the receiving party may not agree to it). A never-ending obligation to keep the information secret is rarely likely to be appropriate or enforceable in law. The duration should be tailored to the nature of the information, and how long it is likely to remain of a confidential nature from a commercial perspective . For example, information relating to a new product could be protected until the product goes to market and is therefore publicly available.
It is crucial to remember that NDAs are simply one tool for protecting sensitive information and should be used as part of a larger plan to keep your information private.
It’s also critical to restrict the information you provide, keep it on a need-to-know basis, and do your homework on potential partners – can you trust them, and do they have a strong track record? These criteria, together with a well-drafted NDA, can help you set yourself up for constructive dialogues that will help your firm flourish.
Brett Lambe is a senior associate at Ashfords LLP