Hey, Can You Keep a Secret?
Non-Disclosure Agreements (variously also referred to as NDAs, Confidentiality Agreements, Secrecy Agreements, Trade Secret Agreements, etc.) (“NDAs”) can be an important form of protection for a startup venture in need of assistance (financial or strategic) from a third party. Often, a startup’s primary asset is its business concept or technology. Because maintaining the secrecy of such information is key to its remaining a “trade secret” under the law, disclosing such information to a third party without having an NDA in place could result in the loss of rights to that information.
Prior to disclosing any non-public information (whether financial, marketing or technical) to any third party, a start-up should attempt to get a written NDA with the potential recipient, pursuant to which the recipient would agree not to disclose any such information (whether it is provided to the recipient in writing, orally or through observation) for at least some period of time. Having such an NDA in place will help to retain the status of the disclosed information as a “trade secret” or “confidential information,” provided that such information was not already in the public domain.
NDAs come in a variety of shapes and sizes. Some are one-way, while others cover disclosures that either party might make to the other. Some are broad in terms of the types of information being disclosed, whiles other are very limited in scope. Virtually all NDAs contain “exceptions” to the obligations of confidentiality (such as independent discovery, public domain status of the information, etc.) The key is that it should describe several things clearly:
- What type of information is being disclosed?
- Does it cover only written disclosures or also oral disclosures? If so, how long does the disclosing party have to document an oral disclosure?
- How will this information be disclosed?
- How may this disclosed information be used by the recipient?
- How long will the recipient have to maintain the confidentiality of the information?
Obviously, a recipient will want to limit its obligations on non-disclosure. NDA non-disclosure obligations typically run from a year to five years in length from the date of the disclosure. However, some NDAs are drafted to have an ongoing non-disclosure obligation that lasts for so long as that information has not entered into the public domain. Once a recipient no longer has to maintain the secrecy of information, it will be nearly impossible for the disclosing party to try to assert, as to the rest of the world, that the information is still a trade secret. So understanding the impact of this term of the non-disclosure obligation is critical.
Getting service providers (other than lawyers—who are already covered by attorney/client confidentiality requirements) to sign NDAs normally is not a big problem. Nor is it normally a problem to get a potential strategic partner or other vendor to sign an NDA. However, venture capitalists, angels and other investors often refuse to sign NDAs on the theory that they see a lot of potential deals, many of which may have similarities to each other. As such, they do not want to be accused of violating a party’s trade secrets just because they end up doing a deal with another company that looks similar. As a practical matter, our experience is that experienced VCs and investors understand that their credibility would be shot and it would be devastating to their ability to see early stage deals were they to disclose anything they might see in a business plan. However, entrepreneurs should be cautious to know with whom they are dealing before taking the chance at making such a disclosure without a proper NDA in place first.
It should be noted that, even when you have an NDA in place, your highest and best protection is always to limit the scope of what you are disclosing to only that which is absolutely necessary for the other party to know related to the purpose of the NDA. The costs of enforcing or attempting to enforce an NDA may be significant, and you can avoid some of that risk and potential expense by not over disclosing in the first place.
David Gurwin is the author of Gurwin’s Keyboard (www.gurwinskeyboard.com), a blawg that addresses developments and trends at the intersection of technology, entertainment and media, and the law.