Learning to share
You’ve a great idea, product or unique service. You know it’s a winner and you’re the founder. You start your business development and planning. There will come a time when every entrepreneur must decide to share their vision with another party – perhaps not immediately – but it will come. It might be an employee, contractor, potential client or investor. Be too possessive and you risk stunting the growth of your business. Too free with information and others may take advantage even steal your idea wholesale. When the requirement to share arises, who do you share with? How do you do it? More to the point, how do you do it and protect your embryonic business from predators?
Non-disclosure agreement (NDA)
At it’s core the NDA is a mechanism to allow you, the entrepreneur, to discuss your unique business model, product or service with third parties and guarantee confidentiality. Breach of an NDA by a third party being actionable in law for damages. Used wisely, requesting a third party to sign an NDA will protect you not harm you.
Basic types and rules
NDA’s can be unilateral or reciprocal. A unilateral NDA is used when only one party is disclosing sensitive information and reciprocal when both sides are making similar disclosures.
The NDA should state its purpose. This can be simply “…to allow the parties to explore a business opportunity of mutual interest…”. It doesn’t need to be complicated.
It’s important to carefully define the confidential information to be regarded as protected by the NDA. You can go further than protecting obvious secrets, but you can’t protect trivial information. So, define it, if you want it covered by the NDA. Be wary of ‘boilerplate’ NDA’s available free on the internet, they may work but could severely let you down. If you are in any doubt and you really do value your business, get a lawyer to tweak an NDA to suit your needs. This needn’t be expensive and could save the day.
Identify the individual persons to be bound by the NDA and fix the obligations for a reasonable and sensible period – perhaps two years. You could go further than individuals and allow the information to be divulged to employees, agents or other representatives in specific and reasonable circumstances. Finally, consider whether the information you are disclosing is personal data and covered by data protection legislation. If it is, you will need a data processing clause to ensure legal disclosure.
When to use an NDA
There are some obvious example targets for NDA’s and arguably one exception. First the obvious.
- IT software and web development. Especially when web-development work is being outsourced or sub-contractors are being used to develop new technology.
- New business opportunities. Sharing business models and negotiating with potential partners, VC’s and where finances and client lists/targets are involved.
- New client opportunities. This could prevent a potential client from utilising the merit in your ideas and asking an alternative supplier to provide the same.
- Sub-contracting. Developers and free-lancers working for the sub-contractor should be equally restrained.
- Employees. Restrictive covenants in the contract of employment can prevent an ex-employee from walking away with your ideas and prototypes.
Dragons and angels
There is one school of thought that strongly advises against asking a potential business investor to sign an NDA. Here’s the theory. Investors hear hundreds of pitches and see as many pitch decks. They will rarely agree to sign an NDA in any event. Are they arrogant or have they got a point? Investors may have the money to steal your idea but rarely will. They don’t build the products themselves nor do they aspire to do so. They could be more useful to you than you think. They may have seen something similar in prior pitches. The information and feedback they can give you could help you refine your proposition for the better. They could correctly anticipate regulatory or compliance difficulties that you haven’t yet seen.
Investors and NDA’s are uncomfortable bedfellows. There is the possibility of finding middle ground. You could make an approach showing the value of your idea to the investor without giving it all away. If they want to see more, you could suggest an NDA.
NDA’s are an important legal tool in protecting your intellectual property rights. Signed in advance, properly executed and tailored to your business needs they can ensure confidential information stays protected in a variety of situations. You should have no hesitation in using them.
Just make sure that, as a business founder, before you embark on exploratory meetings and negotiations with others that you yourself are not restricted by prior NDA’s or employment contract restrictions.
Opus Underwriting Limited.