Tobechukwu Ndunagu, Associate
If you are a startup or business generally about to pitch to investors, you may want to have a Non-Disclosure Agreement (NDA) to make sure that any confidential information you share about your business model is not disclosed to anyone else without your authorization.
Or, if you are a small business or startup about to engage with another party, and you will be disclosing sensitive and key information about your business, an NDA is a good way of making sure that this information is not unduly disclosed and consequently exploited by the other party or third parties.
When you are engaging with investors, suppliers, or even contractors, it is natural that they will have access to some of your confidential business information. This could include anything from your internal business administration documents to your client databases. The last thing you want is somebody using this information and sharing it with others or taking advantage of the new found knowledge. And this is where an NDA comes in.
In many ways, an NDA protects confidential information that could also be seen as the ‘intellectual property’ of your business —the intangible assets that keep your business unique from its competitors.
And, while there are many ways to protect your intellectual property, navigating through these options could be a little bit overwhelming.
So, having an NDA is usually a good place to start.
An NDA is a legal contract between parties who are about to share confidential material, information, or knowledge; and want to make sure that it is actually kept confidential.
In a nutshell, if you are the receiver of an NDA—the receiving party—you are asked to promise that you will neither disclose or share the confidential information with anyone nor use the confidential information to benefit yourself without the authorization of the disclosing party. On the other hand, if you are the issuer of an NDA—the disclosing party—you are asking someone else not to share the confidential information with anyone or use the information to benefit themselves, without your authorization.
You can identify a non-disclosure agreement by other names apart from an NDA. Such other names include:
- Confidential Agreement (CA)
- Confidential Disclosure Agreement (CDA)
- Secrecy Agreement (SA)
- Proprietary Information Agreement (PIA)
Types of NDAs
Generally, there are three types of NDAs:
- Unilateral NDA: In this type of NDA, two parties are involved. Out of the two, only one party discloses confidential information and expects the other party to prevent the information from any further disclosure.
- Bilateral NDA: In this type of NDA, also known as Two-way NDA or Mutual NDA, two parties are involved and both parties disclose confidential information to each other with an intention to protect and secure the information from external parties. Noticeably, this NDA seems to be more agreeable between parties as parties prefer to sign this NDA, even where the other party may not be disclosing any confidential information.
- Multilateral NDA: In this type of NDA, three or more parties are involved, out of which one or more of the parties discloses or disclose a piece of confidential information and the other parties or party promise to have that information protected from any unauthorized disclosures.
When you need an NDA
There are multiple instances when you might need to sign an NDA for your business. A few of them include:
- While entering into a business deal: If you are inviting a vendor or a consultant and want to ensure that the information you share is not unduly disclosed or exploited, having an NDA signed by the other party is strongly advisable. In early-stage startups and some information-sensitive companies, it is a splendid idea to make each employee sign an NDA. This helps in ensuring that something as simple as the strategies, projected numbers, and other financial or business information do not go out of the system without authorization.
- While starting a new project: Let us say you are an established business and planning to start off a new project. This would require the involvement of both internal and external stakeholders. It is advised to sign off an NDA so as to avoid any ambiguity or claims that may arise from either end at any point in time.
- While talking to investors or during mergers and acquisitions: This was a very common practice in the past. But modern-day investors often refuse to sign NDAs at a very early stage and hence, the practice is gradually becoming obsolete now. At a point when the need arises to dig into the papers and numbers and the communication reaches advanced stage, a request to sign an NDA could be made. This should carry clear justifications as to why signing an NDA is needed. Same applies to the process of mergers and acquisitions.
Why you need an NDA
- Clarity: It clearly states—in written format—anything that comes under the bracket of ‘confidential’, avoiding any ambiguity or loss of information in the long run.
- Dispute Resolution: Since an NDA is a legal document, it is of immense importance for any conflict that might arise in the future. Any party infringing the agreement would be legally liable to compensate for damages.
- Secrecy: It maintains the secrecy of the information shared between two or more parties and reduces the chances of important information being unduly disclosed or exploited. Also, it protects disclosures of intellectual property (including trade secrets, proprietary information and other confidential information), safeguarding the disclosing party’s business interest.
- Unfair use: An NDA, apart from protecting confidential information from being shared with another party or without one’s consent, it also primarily protects the owner from a party that unduly uses such confidential information to benefit itself.
It is worth noting that an NDA is not binding against the whole world, but only binds the parties to the NDA.
This is one of the reasons why whenever the confidential information involved is intellectual property, the disclosing party is in a safer position if the intellectual property—whether a brand logo, industrial design, invention, or literary work for example—has been trademarked, registered, patented, or copyrighted.
If otherwise, the disclosing party risks losing what should have been its proprietary rights or interests to strangers it is unable to sue.
So while NDAs could be very useful for protecting unregistered or unregistrable intellectual property such as trade secrets for example, NDAs are not the best protection for most other types of intellectual property.
What happens if any clause from the NDA is violated?
At any point, if you discover that any confidential information covered under a clause of the NDA is being unduly disclosed or used by a receiving party, it is crucial to quickly bring this to the defaulting party’s attention.
In order to take any legal action against the defaulting party, evidence of unauthorized disclosure or undue exploitation of the confidential information is vital. Get answers for questions relating to the particular confidential information leaked or misused; the person who leaked or misused the confidential information; time the confidential information was leaked or misused; how the confidential information was leaked or misused; and what is being done with the confidential information, etc. To assist you with taking effective legal action, consult a lawyer or law firm that has expertise and experience with intellectual property and also understands your business.
With this, you are all set to safeguard your business and its details by putting a quality NDA in place. NDA comes under the bouquet of the little things that build the prerequisites of any successful business.
An NDA is more than just a legal contract that might often be used as a scare tactic!
At Infusion Lawyers, we have seen the power of an NDA as a great tool for companies, small businesses and Startups. We understand the use of NDAs that are specifically tailored to deal with a particular kind of idea and business initiative.
Whenever you engage in important commercial discussions, it is always important to make sure that all parties are on the same page.
Having an NDA between you and another party instills a degree of trust and confidence, which in turn assists and enhances successful negotiations.
For this reason, NDAs are a valuable tool for businesses as parties can feel reassured that any confidential information and intellectual property enjoys some level of protection.
‘Why your startup badly needs an NDA’ is part of Infusion Lawyers’ ‘What Startups Badly Need Series’. Subscribe to our blog so you never miss a post in this series.
You can subscribe to our Three Square Meal Startup Bundle which comes with an NDA among other legal documents as well as legal services. It is a three-pack bundle specially prepared and packaged for startups that need accessible, affordable, and flexible legal solutions. To get started with a Three Square Meal Startup Bundle, click here.
You may also get started with an IP Power Max Account which could be tailored to your business needs. Click here to learn more.
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Thank you for this informative post. It was educating!