The Basics of Non-Disclosure Agreements

Non-disclosure agreements, or NDAs, are a form of confidentiality agreement whereby one party agrees to keep the information another party shares with it, either orally or in writing, private.  Often times, this is done in exchange for the opposing party agreeing to do the same.  In this regard, NDAs are very important in that they give the parties to the agreement a remedy for breach of the agreement, specifically, a contract cause of action.  As a startup, you don’t want to be in a situation that requires a lawsuit, but if someone does steal the information you shared with them, you will obtain the quickest and best result if you had previously signed and NDA with that party.

Types of NDA. There are two basic types of NDA — a unilateral NDA and a mutual/reciprocal NDA.  The former is where one party is going to be doing most of the sharing and the other party agrees not to share what they see or hear.  A mutual NDA is where there are more fluid discussions, usually around strategic partnerships, where both parties are sharing information that they would prefer wasn’t public.

As a startup, you don’t want to be in a situation that requires a lawsuit, but if someone does steal the information you shared with them, you will obtain the quickest and best result if you had previously signed and NDA with that party.

Definition of Confidential Information. An NDA is typically comprised of a promise not to share the information you obtain from another party in exchange for that party promising the same (a mutual NDA, as discussed above).  This information can range from schematics and photographs, to strategic plans, customer lists and financial data and is usually referred to as “confidential information” or “proprietary information.”  In short, each NDA will include a definition of the types of information the parties prefer to maintain just between the two of them.  Very frequently, this definition includes some catch-all language like this:

All of the Disclosing Party’s business plans, present or future, or potential customers (including the names, addresses, needs and/or any other information concerning any customer or consumer), marketing, marketing strategies, pricing and financial information, research, training, know-how, operations, processes, products, inventions, business practices, databases and information contained therein, its wage rates, margins, mark-ups, finances, banking, books, records, contracts, agreements, principals, vendors, suppliers, contractors, employees, applicants, skill sets of applicants, sales methods, marketing methods, costs, prices, price structures, methods for calculating and/or determining prices, contractual relationships, business relationships, compensation paid to employees and/or contractors, and/or other terms of employment, employee evaluations, and/or employee skill sets.

This can be narrowly tailored to specifically address the types of information that is actually being shared, if you know it in advance.  If you are not sure of everything that is going to be shared, then it’s best to keep the definition of confidential information as broad as possible.

Obligations of the Recipient. Once you know what type of NDA you need and what type of information you will be sharing or exchanging, you need to focus on the obligations of the receiving party once they obtain that information.  These obligations include:

  • Not sharing the information with third parties, unless required to by law, for a minimum period of time, typically 1-5 years, depending on the industry;
  • Taking reasonable precautions to safeguard the information they receive that are at least as stringent as the safeguards they use to protect their own information;
  • Not reverse engineering or decompiling the information;
  • Notifying the disclosing party of any leaks of the disclosed information;
  • Complying with all government rules and regulations, including export and import laws; and
  • Ceasing use of the information and returning it to the disclosing party upon termination of the NDA.

NDAs typically conclude with some general legal terms and conditions pertaining to applicable law, jurisdiction and types of remedies, as well as conflict resolution, all of which are important but I don’t want to bore you with those terms here.

  • Don Rucker

    Great information. Large primes prefer to use mutual NDAs, arguing that if it’s good enough for us, it’s good enough for them.  Don’t fall for the trap — the small company is most at risk as they don’t have the resources to fight and are usually providing the most information.  Small companies innovate, large companies integrate.  So don’t let an integrator steal a good idea.

  • http://theneighborhoodentrepreneur.com Tolis Dimopoulos

    Don, excellent, excellent point. If anyone knows the large primes, I know you do. I’ll be doing another post on strategic discussions and how pitches and demos fit into that. Thanks for sharing this with everyone.