Do you think you need a non-disclosure agreement (NDA) to protect your business ideas? Do you or a business partner want one in place before you team up? You may find that not everyone is excited about or willing to sign an NDA. To understand why, you need to understand how NDAs work along with what happens if someone violates an NDA.
A non-disclosure agreement is an agreement to prevent others from using your confidential information to their benefit. The agreement will contain language to the effect that proprietary information or trade secrets cannot be shared with others, used to create a competing product or service, or otherwise used to the signer's benefit.
Some NDAs will have a time limit while others are in effect indefinitely. The NDA may also state which damages a person who breaches the NDA is liable for and how any disputes over the NDA should be settled (for example, in court or arbitration and in which city or state).
If you have worked hard to create an idea, you probably do not want someone to steal it. You have likely heard at least one story about a founder of a large, publicly-traded tech company who allegedly stole an idea or code from a co-founder and cut that person out of their share of the company.
The entire purpose of an NDA is to protect your ideas and work so you can start your business without someone taking what you have done, finishing it without you, and claiming all of the profits for themselves. When you talk to potential business partners, investors, employees, or contractors, they will naturally want to know more about your business to decide if they want to do business with you. An NDA gives you a way to have these conversations without the risk that you are giving away your secrets to a potential competitor.
Entrepreneurs obviously want the benefits of a non-disclosure agreement, but it goes deeper than that. To an entrepreneur, their business is their baby that they have put everything into. This makes entrepreneurs highly protective of their business and their ideas.
For an entrepreneur who spends a huge portion of their life going over the small details of their business, any piece of information can be used to compete with them. Therefore, an entrepreneur may want an NDA in place before having any sort of detailed conversation about their ideas and operations.
Nearly all entrepreneurs will reach a stage where their business needs professional advice. But what they find is that professionals, such as lawyers, almost universally refuse to sign non-disclosure agreements. This is not because your CPA or attorney is waiting to steal your idea; most would not even have the expertise to steal and recreate your idea if they wanted to.
The real reason professionals will not sign your NDA is to avoid liability. If a CPA does your tax return and then later does the tax return for someone who has replicated your business idea, then there is a risk to the CPA of having to defend a claim that they breached the NDA even if they did nothing of the sort. While you might be reasonable enough to not bring such a claim, many overprotective entrepreneurs are not so reasonable, especially if the competition has put them out of business.
Your ideas are your own creation, and you may have even found a truly unique secret sauce. However, when an attorney or other professional is dealing with dozens or hundreds of clients, it is almost certain that at least a few of those clients have had very similar ideas. The reward of signing one extra client just is not worth the risk of having a conflict over an NDA.
Venture capitalists and other investors also refuse to sign non-disclosure agreements for reasons similar to business advisers. However, the risks for them are slightly different.
An accountant might only have your financial statements and know little about the technical side of what you do. During an investment pitch, potential investors will want to learn as much as possible about your idea and how you plan to grow. In the right hands, the information they ask for could easily be used to create a direct competitor.
The problem for investors is that there is always going to be similarities from one pitch to the next. This is especially true for investors who are known for specializing in certain niches and who attract a high volume of pitches in the same field. With guaranteed overlap between pitches, investors cannot reasonably protect themselves from an allegation that they violated an NDA and stole a rejected pitch. Their solution to this problem is to simply refuse to sign NDAs knowing that even if they miss one winner, the rest of their portfolio will make up for it.
In some cases, it may be possible to ask a venture capitalist to sign a limited non-disclosure agreement. To achieve this, you would first need to show why you are presenting an opportunity that is compelling enough to consider it. You would also likely need to ensure that the non-disclosure agreement is extremely limited in scope. This might be by covering only specific pieces of information or by limiting how the venture capitalist can use the information in a limited way that allows them to continue to talk to other founders.
Just because someone will not sign a non-disclosure agreement does not mean your ideas are unprotected. In fact, there are many alternatives to an NDA.
To decide if you really need a non-disclosure agreement, ask yourself the following questions:
If you have decided the risks of not using a non-disclosure agreement are too great, it is time to make sure you get your NDA right. Follow these general guidelines:
A very broad NDA is easy to write and gives you the greatest protection, but that also means the other person has to worry more about accidentally violating it or not being able to do business with others. To avoid these types of concerns, limit the NDA to specific topics, such as your client list, rather than using broad terms like 'all information.'
You should not have one NDA that you use for all situations. Instead, change your NDA based on who you are working with. For example, employees and independent contractors each have a different relationship with you and have access to different information. Your NDA should reflect those differences.
In addition to potentially scaring people away, an NDA that is unreasonably strict may not even hold up in court. Common reasons judges invalidate NDAs include:
Instead of asking for everything, think about what you really need. Do you have the secret formula for a world-famous soft drink, or do you just need a year to make sure you are first to market?
A non-disclosure agreement should include which state's laws govern the agreement, how to resolve disputes (court or arbitration), and who pays for attorneys' fees (the loser or each party pays their own). This is especially important when you are dealing with someone who has much deeper pockets than you to avoid being prevented from exercising your legal rights due to overwhelming legal costs.
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