Serena Manzoli is an ex lawyer, a startup person and social media at Peppercorn, a place for creating your contracts in minutes and in many languages. Here, she kindly writes some handy tips about Non Disclosure Agreements for startups...
A non disclosure agreement aka NDA or confidentiality agreement, is an agremeent where one party or both agree not to disclose information. Right. But when do you need one and what should you put inside? You’ve probably heard a lot of stuff on this, so I’m trying to summarize the main points here.
Personally I’m not a fan of NDAs. They make you sound like the nerd guy at school who never lets you copy his homework. It’s uncommon, in my experience, that the business advantage you have on other startups depends on some ‘secret’ information (unless it’s patentable or really new, like an algorithm). Sure, you may have a cool idea that no one else had, but that’s the first thing you need to talk about if you really want to test its viability with customers. More often, the real advantage you have on other startups is how well and quickly you execute.
Anyway, sometimes you will need a NDA. The cases of life are multiple and variable, so it’s up to you to judge when you need one. But there are some tips I can share.
With whom you need to sign a NDA?
Investors. It’s not uncommon that VCs are asked to sign a NDA on their first meeting with a startup. But consider this: if you’re talking to potential investors and ask them to sign a NDA on your first meeting, you will turn them off. Literally. They talk with hundreds of startups and they just can’t sign an agreement with everyone of them: that will mean risking hundreds of potential lawsuits.
If you have no ‘secret recipes’ (i.e. patentable stuff, algorithms), just talk about your idea and share it. Share the idea, share the business plan.
If you have secret recipes, then it’s different. If you have a patentable idea, patent it first. That’s the best way to make sure your product can’t be exploited by someone else. If you can’t afford to patent it or if your confidential information is not patentable, then don’t share it on the first meeting. VCs don’t need to know the technical details on the first meeting anyway. Only when you are asked to disclose this stuff, typically when they’re really interested in investing, then ask them to sign a NDA. Yes, now you really need it.
Employees, collaborators.You’re hiring people to work on your project. In this case, either you have secret stuff (algorithms) or you’re worried about disclosing some business process, market strategies and similia, it makes sense to ask employees to sign it. But again, don’t overdo it. For instance, don’t ask a freelancer to sign something if you know he can’t possibly come in touch with sensitive information. It’s mean, it restricts its freedom, it’s unnecessary legal stuff. Sure, you feel more relaxed. But that’s how I see it: business is a social process, you need to take care of many parties, not just of yourself.
What to put inside. Ok, let’s say that you really need a NDAs. What should you put inside?
First, define what is confidential. Try to avoid, general definitions like “any sensitive information disclosed to the other party” or “the software”, if you can. A good tip is explicitly marking documents as ‘confidential’ and refer to them in the contract ‘any information the disclosing party has marked as confidential’. But sometimes you just can’t put everything in writing and you need to disclose confidential information orally: so what do you put in the NDA? Some authors suggest to communicate orally the information, stating that is confidential, and afterwards putting it in writing. Another good tip is defining all the source code as confidential.
If you can’t be so precise, then you can state that everything is confidential, except what is not: for instance, what is publicly known at the time of disclosure or what the receiving party already knows.
Second, to whom confidential information can be disclosed? Sometimes the receiving party needs to disclose confidential information: for instance, to other people working on the project. You can put it like these: “The receiving party can share the confidential information only if authorized by the disclosing party”. Or, if you already know who’s going to be involved in the project - receiving party employees, for instance, you can just mention them in the NDA straight away.
Heads up! NDA are not Non competes
So far I’ve assumed you wanted someone else to sign a NDA. But I imagine now that you’ve been asked to sign one - because you’re a startup’s employee for instance or because you’re a freelancer doing some job for a startup. Now, make sure that the NDA clause is not mixed with some other stuff, like a non competition agreement/clause. It sometimes happens, but they’re two different things. By signing a non compete you agree not to work for another company - generally in the same industry: that can be really limiting if you’re a freelancer who needs to work on many different projects. So, heads up!