Non-disclosure agreements: A word to the wise to entrepreneurs

In Intellectual Property, Technology by lowndestech

By Steve Thomas – Shareholder, Lowndes

September 01, 2021, 12:54pm EDT

As a startup, one of the most exciting moments in your company’s growth is receiving a proposal from a large strategic or market player who wants to engage in a technical interchange in support of a potential business arrangement. Typically, an offer is made to enter into a non-disclosure agreement (NDA), sometimes also referred to as a confidentiality agreement or proprietary information agreement.

Often times, entrepreneurs are hesitant to negotiate the NDA’s terms fearing that either party will walk away if too much time is lost in the process. Many also wonder if it’s a good idea to negotiate with a possible partner – after all, is that the way we want to begin this relationship? Besides, aren’t NDAs just boilerplate documents that aren’t really enforceable? Aren’t we just wasting time and money negotiating this NDA?

First and foremost, a potential investor who is interested is talking with you about your venture is highly unlikely to walk away simply because you need to negotiate some of the NDA’s terms. In fact, they probably expect you to do so. Additionally, most, if not all, equitable “partnerships” require at least some negotiation of terms, so it may be good to set the stage for amicable negotiations at an early stage.

As for the NDA itself, a boilerplate document should not be used since individual circumstances vary widely from party to party. And, yes, properly drafted NDAs can be enforceable. Most importantly, the NDA can help protect your confidential information and trade secrets from falling into the hands of a competitor, without restriction on its use.

This doesn’t mean that significant time or money needs to be spent on getting a prospective NDA in shape for signature. It simply means every NDA should be reviewed carefully to make sure that it protects confidential information and trade secrets accordingly and that it has a good chance of being enforceable.

NDA terms that typically need review and discussion are:

  1. The definition of which information is, and which is not, “confidential.”
  2. The term of the agreement and the term of the confidentiality requirement (these are not the same thing).
  3. The choice of law and venue for settling disputes.
  4. The treatment of trade secrets (trade secrets and confidential information are two different types of information, although they may overlap).
  5. The specification that there is no requirement on either party to share any confidential information.
  6. The setting forth of restrictions on allowable uses of the shared confidential information.

Boilerplate NDAs usually fail on at least one, and usually more than one, of these points.

As a business owner, you should have an overall intellectual property strategy that incorporates the quiver of tools at your disposal to use, as appropriate. In addition to NDAs and other agreements, you can opt to simply not share your intellectual assets, choose to treat them as trade secrets, seek patent protection, or take other steps. Each approach has its own legal requirements, risks and benefits, with some no longer available if too much time has passed or if certain events have occurred. Early planning is key.

Given all this, here are some practical tips concerning NDAs or similar agreements.

  1. Carefully consider your intellectual property strategy as early as possible. Continue to reassess it and keep it fresh and relevant.
  2. Do not let the fear of losing business drive the execution and sharing of confidential information under a bad NDA. Take time to negotiate an NDA that protects your intellectual assets.
  3. Never share more than what is absolutely necessary. The best way to protect confidential information is by keeping it secret. This is especially true for trade secrets.
  4. Consult qualified counsel early to ensure that you understand all the steps that need to be taken to achieve an appropriate level of protection for your company’s confidential information, as well as when those steps should be taken.

When it comes to sharing confidential information, which may include vital trade secrets, there is simply no substitute for a well-drafted NDA. A boilerplate agreement will not suffice. As the saying goes, an ounce of prevention is worth a pound of cure. By taking small steps now to protect your confidential information from being shared, you can avoid the extremely difficult –and sometimes impossible – task of finding a remedy to get it back down the road.