Intellectual Property

NDAs Decoded: What They Are and When to Use Them

Authors: StartupPercolator

NDA Defined

A nondisclosure agreement (or “NDA”) is a contract illustrating how confidential information will be shared and protected by two or more parties.

NDA Demanded

Knowing when to request an NDA to key in ensuring the NDA helps you more than it harms you.  For example, most venture capital investors will refuse to sign an NDA–they constantly listen to start-up pitches and meet entrepreneurs across all business sectors.  Chances are they have heard or will hear ideas comparable or identical to yours, so signing an NDA is not only an unrealistic expectation, it is a professional hazard.   Bottom-line, an NDA can damage your new and developing relationships with investors, who may perceive you as inexperienced and/or difficult to work with.  But you can still give an engaging pitch without (or limiting) risk to your confidential information by presenting your business plan and/or product without revealing the confidential specifics, i.e., systems, source code, data, formulas, etc.

So when is an NDA useful?  First, all of your consultants and employees should be required to sign an NDA or have nondisclosure requirements in their service/employment agreements in the form of an attached “Proprietary Information and Inventions Agreement.”  Their direct and detailed contact with the company’s “behind the scenes” information justifies your need to protect the company.  Second, for advisors and investors, an NDA would be more appropriate as provisions included in the related advisory agreements or investment documentation, when there will be substantial and substantive access to your confidential information.

NDA Drafted

Type of NDA: NDAs are typically prepared as unilateral (“one-way”) or mutual (“two-way”). Unilateral NDAs protect only one party, the one disclosing confidential information. Mutual NDAs protect all parties and should be used when there is reciprocal exchange of classified information.

Terms to Include in Any NDA:

1.  A statement of purpose regarding why the information is being disclosed (i.e., the parties wish to explore a business opportunity of mutual interest).

2.  A detailed description of the confidential information being discussed so that the parties are clear which information must be protected. The definition of “confidential information” may vary depending on your type of business, but typically includes all oral and written proprietary information such as data, trade secrets, processes, drawings and engineering, hardware configuration, marketing documents, promotional methods, volumes of sales, customer, vendor and supplier names, product development plans, forecasts, and strategies, to name a few. It also excludes certain types of information: already public, already known by the nondisclosing party, obtained from a third party, or a required disclosure pursuant to a court order.

3.  A provision outlining when and to whom confidential information can be divulged in specific and reasonable instances. These may include employees, agents, and representatives, but on a “need-to-know” basis (i.e., sharing confidential technical information with a receptionist is unnecessary, but sharing it with the vice president of engineering to evaluate the business opportunity makes sense).

4.  How confidential information should be treated or a “standard of care.” This would at minimum require each party (or, in the case of unilateral NDA, a recipient) to use reasonable measures necessary to prevent disclosure and unauthorized use of the confidential information. It would also require a party to immediately notify the other party if this confidentiality is breached.

5.  How long the confidentiality obligations under the NDA will last. Standard NDAs have a term of three to five years.

NDA Defensive Strategies

As they say in sports and war, “The best defense is a good offense.” This adage applies in the beginning stages of formation and continues through the company’s life cycle; you should always be thinking about how to actively protect your intellectual property (“IP”) in advance. Often you are so focused on developing your ideas or product, you fail to set up the necessary precautions to protect them—”Those who fail to plan, plan to fail” (I have a million of these). Making it standard practice to require employees, consultants, advisors and any other third-party service providers or vendors to sign NDAs not only safeguards your confidential information, it creates a record demonstrating active intent to protect yourself, which may help you in legal proceedings should you experience the unfortunate theft of your IP.

And you will not always be the one asking for an NDA; frequently you will be asked to sign one. Sometimes you will have leverage to negotiate the terms, to make it mutual or less restrictive. In this case, you can refer to the above information when considering what changes to request. But more commonly, you will be in discussions with a “bigger” company using institutionalized forms drafted in its favor that it refuses to revise. Here, it is important to understand the NDA and to be mindful on how to approach any discussions with the other party. Strategies include, for written/e-mailed exchanges, qualifying any confidential information disclosed with a statement identifying that such information, document, etc., is to be considered confidential and, for live meetings or calls, being careful of what information to disclose.

Another issue to consider, which is regularly overlooked by founders, is any NDA you signed with prior employers. The last thing you need is to be in the middle of your first financing when your former employer surfaces and insists that the IP you developed actually belongs to them. Get copies of all documents you signed prior to departure (or if that is not an option, request copies be sent to you) and review the provisions with an attorney so that you are clear of any confidentiality obligations you still have and determine whether your confidential information is, under all circumstances, your confidential information.

How to Prepare for an Equity Financing

We have covered in past FTTWs how to value your startup and how much capital to raise. Once your startup decides to pursue equity financing, you should start to prepare for the investor due diligence process. On the business side, you will need to prepare a business plan and should take steps such as obtaining management references, interviews and background reviews, customer/user references, technical/product reviews, financial statements and business model reviews.

What Every Startup Needs to Know

On Wednesday, June 26th, Perkins Coie’s Palo Alto office hosted the startupPerColator event, “What Every Startup Needs to Know.” Lowell Ness, a Perkins Coie partner in the Emerging Companies & Venture Capital (ECVC) practice, moderated a panel which included Herb Stephens of NueHealth, Thomas Huot of VantagePoint Capital, Jennifer Jones of Jennifer Jones and Partners, Yuri Rabinovich of Start-up Monthly, and Olga Rodstein of Shutterfly.