When Do I Need a Non-Disclosure Agreement to Protect My Idea?
Have you heard of an NDA? It stands for Non-Disclosure Agreement, and is one of the most common terms you will run into when developing a new idea into a product or company.
In a nutshell, it’s a legally binding document that requires whoever signs it to maintain the secrecy of the ideas and work that they are exposed to.
It can help a new inventor in three common ways:
- Protecting sensitive information
- Helping to maintain patent rights
- Clearly stating what information is private and what is fair game.
Although it’s not an exact match, you can think of an NDA the way you would think of the attorney-client relationship or doctor-patient confidentiality. If someone signs your NDA, they are obligated to keep the information they learn secret unless they first get your permission.
But when, in the course of bringing your concept to life, do you need one?
Common cases that come up include:
- You’ve created a business model and you’re presenting it to a potential investor
- There is a specific process or tool you’re creating, and you want to test it by partnering with another company or inventor
- You have access to specific, not widely known information about a market opportunity
Although NDAs can be used in a variety of ways, they are most valuable when you have information or a product that’s truly not available in the market already in some way. How often you’ll need to use one depends a lot on both the leverage you have in a situation, as well as the ease at which someone could use your knowledge in a way that could hurt your project.
Here are a few common scenarios, and how to handle them…
- Big Companies
- Investors
- Other Inventors and Entrepreneurs
- Employees
Big Companies
Large companies often have big legal departments and / or an in-house lawyer. When it comes to NDAs, it’s a bit of a gut check, but the general rule of thumb is to operate with one.
Often, the idea itself isn’t that valuable (and may have already been thought of within the company) but the execution is particularly valuable. So while you might freely share the idea, the exact way you are going to get it done or the product that you have created should be kept under wraps. A good example of this is the screenshot versus code scenario — where you provide images of the experience of a new app or product, but you don’t provide them with a lot of detail of the underlying code that will drive it.
Investors
Many investors refuse to sign NDAs. There are various reasons for this, including the fact that they don’t want to be targets for potential lawsuits, and that NDAs can be unenforceable from the standpoint of resources. You may have a perfectly good case and still be unable to pursue it because litigation is expensive and time-consuming.
The good news is that investors have a reputation to uphold, and if word gets out that they divulged private information for competitive advantage it would be hard for them to find new companies to fund. This makes it very rare that an investor will do so, but, if an investor has other, similar companies or products in their portfolio, it is a possibility. The easiest way to avoid this is to be careful about what you share up front. You can outline your business model carefully without giving them the actual, core process for how you’ll get your idea turned into a product.
Other Inventors and Entrepreneurs
This scenario involves possibly finding someone to work on an idea with you or someone who might be interested in partnership of some sort. In this case, it’s imperative that you have an NDA in effect, because this is the type of relationship where the person you’re working with comes from the same background, they’re actively involved in turning a new idea into a product or company.
As with investors, it can be difficult to enforce a broken NDA with other inventors or entrepreneurs, but it does happen. And when there isn’t a good NDA in effect and a company sees sudden success, you’ll often see ex-cofounders or early employees make claims about what they contributed to the company that wasn’t under NDA.
Employees
This is one of the few cases where having an NDA automatically built into a contract makes a lot of sense. If you’re hiring full-time employees to work with you there are some basic protections already built into your company structure, and you should add an NDA to that. Usually, the NDA will include what’s called a “non-compete” clause, which keeps them from going to work for a competitor in a given period of time (often 1–2 years).
If you’re hiring someone on contract, it’s even more important to use an NDA. The goal isn’t to get to court, although some cases do, it is to protect your idea and to be able to clearly articulate to employees what their responsibilities are and what will happen if they fail to follow them. Think of it as Robert Frost’s “Good fences make good neighbors,” but for contracts.
WeGreenlight.com is a platform to help you validate your ideas, get feedback, and launch with early adopters. Join us and let’s help you launch your idea successfully.
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