How and When to Protect Your Company With a Non-disclosure Agreement (NDA)

Non-disclosure agreement
Non-disclosure agreement
The importance of protecting company secrets cannot be gainsaid.   Many entrepreneurial projects are dependent upon the protection of trade secrets of proprietary technology.   Entrepreneurs seeking funding at early stages often find themselves at a cross roads between protecting this information, and revealing it to potential investors in the hopes of obtaining funding.

The Non-Disclosure Agreement (NDA)

The most common way to protect confidential information of this sort is to have any individual who you share this information with sign an NDA.   If company information is disclosed without the protection of this contract, the information obtained can be given to anyone outside of the company, including competitors without any legal recourse.   In addition, a public disclosure of secret/sensitive company information can prevent the filing of a patent application for that particular invention/discovery as well as claiming trade secret protection.   This can leave you without any rights to speak of.  

When to present an NDA

If you are an entrepreneur looking for funding, chances are you are over-protective of your trade secrets and intellectual property.   This is often at odds with early stage investors who can’t be bothered with signing legal documents presented by strangers. Often, angel investors and venture capitalists are presented with hundreds of ideas a week, and they are therefore reluctant to sign their name willy-nilly on the off chance that they will incur liabiilty for being involved with a similar idea at some point in the future.

The biggest problem then is to present an NDA too early in the investment process – during their first meeting before a business plan is presented or even before they reveal their company name. This is a bad idea.  Instead, an initial presentation and business plan should be tailored to exclude actual intellectual property or confidential information, but reveal enough to entice prospective investors into further evaluation of the company.   To this end, it is incumbent on the entrepreneur to craft an initial presentation that is both compelling and does not reveal secrets off the bat.

Know that only in exceptional circumstances or during the due diligence process will investors normally consider signing an NDA.   Any period before the due diligence process is considered by many to be premature. However, since many times confidential information will become intimately known at the due diligence stage, entrepreneurs should retain counsel to draft a good NDA.

The importance of an attorney

An entrepreneur should seek the assistance of an attorney who can prepare an NDA for them. It is a sensitive and important document, so it pays to have experienced counsel in this regard.

If you are boot-strapping, many attorneys will offer alternative fee arrangements to make this document more affordable. Business owners should always make sure to protect their intellectual property, including all proprietary and confidential company information. They should not disclose any restricted information to outside sources without the provision of an NDA for all of the parties that are privy to the sensitive information.   An entrepreneur can protect themselves by having an NDA prepared by their attorney.

This is not legal advice.

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