Keeping it a secret — the basics of NDAs
Written non-disclosure agreements (NDAs), are a good way for individuals and companies to protect their intellectual property before they reveal sensitive information to a third party.
When might you use one?
When you want to make sure that the recipient of the sensitive information only uses that information for a specific purpose and does not disclose the information to anyone else, such as one of your competitors.
Here are some examples of when you might enter into an NDA:
- you’re thinking of engaging a consultant to help with sales
- you’re thinking of disclosing financial information to a potential purchaser of your business
- you’re thinking of developing a prototype product with another company
Features of a non-disclosure agreement
Here’s a quick run-through of the key features of a non-disclosure agreement:
- Parties — these are the individuals that will be disclosing the sensitive information and those that will be bound by the restrictions. Although it might sound obvious, it’s important to define the parties to the NDA carefully. For instance, if you’re disclosing information to another company, you will probably want to make sure that the restrictions also apply to the company’s employees and contractors.
- Purpose — this is the most important term in the NDA. It sets out the circumstances in which the recipient is permitted to use the sensitive information you’re providing to them. For instance, you might be handing over details of your app to another person for product testing purposes. It’s very important that you define the permitted purpose narrowly, so that the recipient cannot use the information in any other scenario.
- Defining confidential information — the term “confidential information” should be defined carefully so that it is very clear what type of information is considered sensitive. It’s usual for a broad range of information types to be included, for example: trade secrets, business plans, mockups, customer lists, source code etc.
- Exceptions — it’s common for there to be a range of exceptions to what’s considered “confidential” in an NDA. For instance, information that is already publicly known would be a very typical exception to the definition of confidential information. Also, information which a party discovers independently without recourse to the sensitive information being provided to them, will often be another exception. As a discloser of information, you’ll want to keep the list of exceptions as short as possible.
- Term- this is the period of time during which the parties agree that the information must be kept a secret. It’s important to note that if the time restrictions in the NDA are too long, an English court may not consider the restriction enforceable.
Unilateral vs bilateral
If you’ve been looking into NDAs before, then you might have heard references to “unilateral” or “bilateral” NDAs:
- Unilateral NDAs cover the situation where only one party is disclosing sensitive information to the other. Under this type of NDA, the receiving party agrees to keep the information confidential. An example of when a unilateral NDA might be used is where you’re looking to engage a UI designer to give your application a makeover. You might ask the designer to sign an NDA before you give them access to the inner-workings of your app.
- Bilateral NDAs cover the situation where both parties will be disclosing sensitive information to each other. Under this type of NDA, both parties agree to keep the information they receive from each other confidential. An example of when a bilateral NDA might be used is when you’ve agreed to collaborate with another company on a tech project. Both companies will want to sign an NDA before giving each other details of how their respective systems operate.
What happens if the recipient breaches the restrictions?
If the recipient spills the beans and discloses the sensitive information in breach of the restrictions contained in the NDA, then the discloser is likely to have a breach of contract claim. A court might order that the recipient pays financial damages to the discloser to compensate them for the loss they suffer from the unauthorised disclosure. Alternatively (and perhaps in addition to awarding damages), a court might grant an injunction, ordering the recipient from any further disclosure of the information.
Should I always put an NDA in place before I reveal sensitive information?
Unfortunately, this is a judgement call for the company revealing the information. While NDAs are a great way to protect your intellectual property, you need to be mindful that their use can often be polarising.
For instance, if you’re about to reveal your idea to a potential investor that has a great track record, you might want to think twice before insisting they sign an NDA.
The investment industry is built on trust and investors won’t have much to gain by stealing your idea and running off into the night with it — as professionals, they’ve seen a lot of great ideas land on their desks and will have more to gain by making sure their reputations mean that founders disclose their ideas to them in an honest manner, so that they can help take it to the next level.
Also, as hard as it might be to hear, there may be other founders that have a similar concept to yours. By signing an NDA, investors could limit themselves from participating in other similar ventures, which could mean missing out on the next big thing.
So, although it might feel like a leap of faith, investors will often want to see that you trust them and respect the industry they operate in, which could mean holding fire on emailing over that NDA.
Avvoka is an end-to-end legal document creation tool, allowing businesses to contract with their counterparties in the cloud. We’re delighted to have partnered with a number of London incubators to offer startups a range of free contract templates to get started with. To access your account, sign up here and quote your incubator on the form.
If you’re not familiar with NDAs, remember to always seek independent legal advice before you enter into one.