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When to Use a Non-Disclosure Agreement (NDA) for Your Startup

When to Use a Non-Disclosure Agreement (NDA) for Your Startup

I once heard a mentor at an accelerator say, “NDAs are worthless and if you see a founder trying to get someone to sign an NDA, it’s a clear signal that they’re a startup amateur. Ideas are worthless. I should be able to tell everyone in the world my idea, and if someone beats me to the punch, I probably wasn’t good enough in that industry to succeed anyway.”

There’s certainly some truth to what that mentor was saying. Non-disclosure agreements (NDAs) are certainly overused and often used incorrectly. Heck, I’ve had a few startup founders shove an NDA in front of my face, and tell me they wouldn’t talk to me until I signed.[1]

But to say that no business professional should ever use an NDA is going too far. There are limited circumstances where an NDA makes sense.

Here is a short explanation of when an NDA makes sense for a business.
  1. When an NDA Matters

An NDA matters only when a company has very specific trade secrets or confidential information it wants to keep secret. This is more than just your business “idea.” (“It’s like Uber for Stamp Collectors!”). Think Coca-Cola’s secret formula. Or a highly technical process that is being developed but has not yet been patented (patents are publicly available and not protected by an NDA—they’re protected by patent law).

The thing about confidential information and trade secrets, though, is that they must be treated like trade secrets and confidential information to maintain that status. If you want to keep your trade secrets a secret, then it is best to label all iterations, drawings, recordings, and other materials related to your trade secrets as “Trade Secret – Private and Confidential.”

 

  1. When an NDA Does Not Matter

If your business idea is something you’re discussing at parties, you have announced on Facebook, or on your business’s website, it’s not confidential anymore. And therefore it’s not a secret. And therefore it cannot be covered by an NDA.

Many NDAs have language that is overbroad that tries to protect every piece of information that business partners will ever discuss with each other. These types of NDAs fall into the “worthless” category.

NDAs only protect information that is not otherwise public. And so there is a tension between promoting your business and protecting your trade secrets. But know that if you go public with your “confidential” information in any forum or venue, you forever lose the argument that you kept your trade secrets a secret. And if that’s the case for your business, then you can go ahead and skip the NDA.

 

  1. What an NDA Is Not

The worst misuse of the NDA by novice startup founders is by those who think that it serves as some sort of startup legal document catch-all.

It is most certainly not that. It is for the very limited purposes described above.

It does not take the place of an intellectual property assignment agreement, which assures that a company owns its IP. It does not take the place of an operating agreement, which governs the internal workings of an LLC. It does not take the place of restricted stock purchase agreements, which should be how startups allocate stock among founders. It does not take the place of employment or contractor agreements, which dictate terms of employment and payment for personnel.

I’ve probably had a dozen conversations with startup founders who have found themselves in a startup dispute, and when I asked them if they had a binding legal agreement that would help them resolve their problem, they answered:

“Well, I have an NDA.”

An NDA has very limited utility to protect confidential information and trade secrets in limited circumstances. They are difficult to enforce in the best of circumstances.

When used for the very limited proposition for which they serve, they can help a company protect its valuable secrets. When used for anything else, they only make the person who uses them look like they have no idea what they are doing.

If your business is in need of legal documents more nuanced to your needs than an NDA, it might be time to consult a professional. We support savvy businesses with many of their legal needs. Learn more about our business law services here or contact us for more information.

[1] As an attorney, I’m bound by duties of confidentiality even to prospective clients. If I were to use confidential information in any way other than to represent a client’s interests, violating an NDA would be the least of my concerns. I could get disbarred. Also, venture capitalists and smart angel investors never sign these, because it exposes them to liability based on the number of different business ideas they consider. Show an NDA to a VC and you might as well skip the rest of your pitch. You have already lost them.

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