By: Tyler Stayer

From the outset, startups should seek to protect what makes them valuable. This often includes confidential information such as trade secrets, company know-how and in-development inventions. Startups should work to secure their intellectual property rights and develop a system to protect its internal information to prevent others from misusing or profiting off their ideas, inventions, and methods. A non-disclosure agreement can be an important resource in giving a startup the protection it deserves.

 

 

What and Why?

 

Non-disclosure agreements (NDAs) are entered into when two or more parties want to create a confidential relationship in order for the parties to share information among themselves that should not be available to any other parties outside of those involved.[1] Additionally, NDAs keep information private by holding parties legally responsible for any prohibited disclosures or leaks of information. The most common reason an NDA is used is to protect IP, like in tech where companies get workers to sign NDAs for an app or service to protect from any duplicates being made.[2] NDAs can be critical to protecting confidential information for startups depending on the type of relationships a startup wants to form.

 

When should startups use NDAs?

 

  1. Co-founders – While co-founders may have mutual trust and admiration at the beginning of the relationship, time can cause relationships to fracture. Therefore, it is important for the company that the individuals with the most access to confidential information be restricted in what information they can disclose should they leave the company.[3] All co-founders should sign an NDA, especially when a startup expects its employees to sign NDAs. This can in the form of an NDA or as a part of nondisclosure provisions in another agreement, such as a founder’s agreement. NDAs can be important for founders even before the creation of an entity, as a way of safeguarding ideas.

 

  1. Advisors and Partners – It is important to set guidelines with advisers and partners about potentially talking about products or clients. For example, if a startup works alongside a larger company in developing a product both parties may want to ensure that any confidential information would not be disclosed.[4] A mutual NDA, where both parties anticipate sharing confidential information with the other, may be necessary in this situation.[5] Another example is if a startup decides to partner with a marketing agency, which should lead to an NDA granting access to the startup’s website, email list, social media accounts and advertising accounts.[6] Startups should consider having advisors and partners sign NDAs before disclosing confidential information.

 

  1. Employees – When bringing on employees it is important for startups to be protected. It is often advisable for startups to even get interviewees to sign NDAs as part of the interviewing process if confidential information is being discussed.[7] Protection of sensitive information could also be part of the employment agreement, making an NDA not necessary. An NDA may be useful in circumstances where the startup wants to maintain confidentiality for a term that exceeds an individual’s employment.[8] For example, a startup may want to protect information about its business operations or relationships once an employee has left for another job.

 

  1. Independent Contractors and Manufacturers – When hiring contractors to work on products or with any type of confidential information, it is important to get NDAs due to their access to this information. Manufacturers also become privy to information given their work on the product. A mutual NDA may be necessary in this type of relationship because both parties could have access to each other’s confidential information.

 

 

When NDAs might not be necessary

 

Potential investors may not be willing to sign NDA’s and may even see being asked for one as a negative signal.[9] This is because investors can be pitched for funding by as many as 5,000 companies per year, meaning the signing of NDA’s for every pitch heard would at the very least create a logistical nightmare for investors to operate under.[10]

 

An important thing to determine, at least before spending time and resources on creating NDAs, is whether the startup’s idea is unique. If the idea isn’t unique then an NDA is probably not necessary, as there might not be information that requires protection.[11]

 

 

Conclusion

 

NDAs may be useful for startups when the startup plans to share sensitive information that is meant to be kept private from other parties, including competitors or the general public.[12] To determine whether or not an NDA is necessary for a certain relationship, startups should consider whether it is important that the information being exchanged remain confidential and how the relationship between the parties affects the need for confidentiality.

[1] Alexandra Twin, Non-Disclosure Agreement (NDA), Investopedia (Mar. 25, 2019), https://www.investopedia.com/terms/n/nda.asp.

[2] Nate Swanner, Does Your Startup Really Need an NDA?, Dice (Sept. 20, 2017), https://insights.dice.com/2017/09/20/nda-startup-need-or-not/.

[3] Ryan Kutter, When should startups use non-disclosure agreements (NDAs)?, Gust Launch (May 11, 2017), https://gust.com/launch/blog/nda-non-disclosure-agreement.

[4] Id.

[5] Mary Juetten, Should Startups Really Skip Legal Protection?, Forbes (Jul. 24, 2014), https://www.forbes.com/sites/maryjuetten/2014/07/24/should-startups-really-skip-legal-protection/#d6c94c74e2c9.

[6] Jonathan Long, 5 Situations That Require a Non-Disclosure Agreement, Entrepreneur (Feb. 2, 2017), https://www.entrepreneur.com/article/288581.

[7] Juetten, supra note 5.

[8] Kutter, supra note 3.

[9] Bill Payne, No, I will not sign your non-disclosure agreement., Gust Blog (Feb. 6, 2012), http://blog.gust.com/no-i-will-not-sign-your-non-disclosure-agreement/?utm_source=launch-blog&utm_medium=post&utm_campaign=launch&utm_content=nda.

[10] Id.

[11] Eilene Zimmerman, Why More Start-Ups are Sharing Ideas Without Legal Protection, N.Y. Times (Jul. 2, 2014), https://www.nytimes.com/2014/07/03/business/smallbusiness/why-more-start-ups-are-sharing-ideas-without-getting-legal-protection.html.

[12] Twin, supra note 1.