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- A non-disclosure agreement is a legally enforceable agreement between two parties that specifies that sensitive information exchanged between them will not be shared with an unauthorized third party or profited from. A confidentiality clause is generally given to an employee or consultant by a startup to ensure that its trade secrets or intellectual property is kept private and secure.
- As a founder, you should strongly consider executing NDAs with your employees. This prevents you from losing control of sensitive information, helps you establish a psychological deterrent in the minds of employees (to discourage them from disclosing data), and allows you take possession of ownership rights to intellectual property (wherever applicable).
- An NDA clarifies for employees what kind of information they are required to treat with extra caution. For example, a tech startup might feel the need to keep the following kind of information private: algorithms that are proprietary in nature, customer information and leads, and new inventions or breakthroughs on the horizon.
- The transparency that follows putting down both participants' intentions in black and white well in advance -- through an NDA -- typically reduces the amount of time that it takes a court to reach a decision when an employee discloses confidential data. Under an NDA, you also have the option of arbitrating disputes instead of going to court. This further minimizes the amount of time and money spent on the case.
- Restrictive covenants are agreements that prohibit an employee or any other person affiliated with a startup, from disclosing confidential knowledge to rivals or from quitting and competing directly with you. These constraints are required to protect a startup's financial interests in the event that one or several of its employees uses confidential details received from the startup to compete with it or to help the startup’s competitors.
- There are two kinds of restrictive covenants in most employment contracts -- the non-compete agreement and the non-disclosure agreement.
What is an Employment Non-Disclosure agreement?
A non-disclosure agreement (NDA) is a legally enforceable agreement between two parties specifying that sensitive information exchanged between them will not be shared with an unauthorized entity or profited from. A confidentiality clause is generally given to an employee or consultant by a startup to ensure that its trade secrets or intellectual property is kept private and secure. A confidentiality agreement (CA) is often referred to as a confidentiality provision, an NDA, proprietary information agreement (PIA), or a secrecy agreement (SA).
Who does the NDA protect?
Trust is a necessary component in any successful partnership. However, as a founder, you must take reasonable steps to safeguard your startup, even if this involves imagining the worst in individuals at times.
To safeguard your startup's private information, you can -- and should -- utilize an NDA with your employees. The NDA compels the receiving party (the party that receives sensitive data) to uphold confidentiality and not to exploit the knowledge that they are exposed to as part of their day-to-day responsibilities. In the past, when it came to their employees, most companies used to rely on an implicit ethical responsibility of secrecy. If an employee was found to have leaked sensitive information, the customary response was to punish the individual and, perhaps, terminate their employment.
Businesses like Coca-Cola and KFC, which rely on trade secrets for their existence, require select employees to sign confidentiality contracts or similar agreements. So, if you're debating whether or not to ask your employees to sign an NDA, here are some more reasons why you should definitely do so.
Why do employees need non-disclosure agreements?
Losing access to sensitive information
The millennial generation is recognized as being one of the most mobile workforces in human history. According to data from LinkedIn's Economic Graph, millennials who graduated between 2006 and 2010 are quite likely to work for four different employers in the first ten years of their careers. In the fiercely competitive world of technology, there's also a genuine risk that some of your best and brightest employees may leave to launch their own startup. If you're a founder who is attempting to secure your startup’s sensitive information, this is a major issue.
Even if it's only in their minds, each time an employee departs, they're taking significant knowledge with them. Therefore, you run the danger of losing sensitive data if you don't require your employees to sign an NDA. The NDA binds the employee to keep your startup’s data truly classified and not disclose it for a predetermined length of time, which may even include the period of time after they leave your startup. You may be allowed to incorporate non-competition and non-solicitation terms in your NDA -- based on your state's laws -- to prohibit your former team members from starting a rival venture or luring your other employees or even soliciting your clients for their business.
Impact of psychological deterrence
Even if you never intend to prosecute your employees for breaching an NDA, there's a major advantage to having one anyway -- it establishes a psychological disincentive to disclose sensitive data for those who sign it. If an employee understands that they may be sued, they are much less inclined to steal your sensitive data. Just the “psychological deterrent factor” might be quite helpful in keeping your secrets safe.
Ownership rights to Intellectual Property (IP)
When someone develops a new product, invention, or breakthrough (like a program, design, or technological procedure), then that person is usually the legal proprietor of that creation or technology by default.
With that said, in the U.S., if an employee is onboarded with a specified role to generate new ideas and innovations, then the company retains the IP rights, with some small variances among states. In California, however, Section 2870(a) of the Labor Code stipulates that innovations made solely in the employee's personal time without using corporate equipment, resources, premises, or trade secrets ought not to be attributed to the employer.
To avoid miscommunication or ambiguity, founders should have the employee sign an NDA that includes proprietary rights provisions, which ensure that the possession of any IP that is developed by the employee in the course of working at the startup is securely passed on to you. Of course, in California, such provisions would be subject to Section 2870(a) of the Labor Code. You can also construct a standalone “Proprietary Rights Agreement” or “Invention Assignment Agreement” if you like.
All in all, your proprietary rights provisions should include the following:
- Employee-developed ideas, inventions, and related IP rights are to be transferred to you, the startup.
- The employee's obligations are to assist you in perfecting your rights (with the objective of retaining and enhancing the effectiveness of your rights) if required.
Clarification about what information is confidential/classified
The kind of knowledge that ought to be considered classified within the startup may seem straightforward to you as an employer, but it is frequently not as evident to employees, since they don't have the same panoramic view and perspective that you possess as the startup’s founder.
An NDA clarifies (or spells out) for the employees what kind of information they are required to treat with extra caution. . For example, a tech startup might feel the need to keep the following kind of information private:
- Algorithms that are proprietary in nature
Proprietary algorithms can provide a significant competitive edge to the product or service that uses them. Consider Google's algorithms and how crucial they are to the tech giant's success.
- Customer information and leads
When it comes to driving key objectives like business development, profitability, and revenue, then leads and customer information are among the most important tools to have. Advertisers spend a fortune to understand who is interested in your product/service, who will spend money to get it, and how much they will spend. Companies are frequently prepared to pay money in order to obtain such important information from others. Therefore, you should safeguard the relevant information that you have in this regard.
- New inventions or breakthroughs on the horizon
Being the first to the market has a significant competitive advantage. Consider how damaging it would be to your startup if a competitor learned about the new invention or idea that you had in the pipeline and attempted to bypass you by duplicating it and launching it before you.
Restrictive covenants in employment contracts
Non-disclosure and non-compete agreements are both official contracts that serve as restrictive covenants in employment contracts, limiting what an individual can say or do in specific circumstances.
What are restrictive covenants?
Restrictive covenants are agreements that prohibit an employee or any other person affiliated with your startup from disclosing confidential knowledge to rivals or from quitting and competing directly with you. These constraints are required to protect a startup's financial interests in the event that one or several of its employees uses confidential details received from the startup to compete with it or to help its competitors.
Companies might use one of two types of restrictive covenants and it's vital to know the distinctions.
A non-compete agreement is used to prohibit a former employee who quit the startup from launching a competing business in the same vicinity and in direct rivalry with their previous employer. Non-compete contracts can either be standalone arrangements or terms incorporated into a broader employment contract. In general, a non-compete agreement prohibits an employee from starting a competing business within a given distance of their ex-employer and within a particular duration of time after leaving the company.
A confidentiality clause, often known as a non-disclosure agreement, prevents an employee/independent contractor from unlawfully releasing any classified information obtained during their work. Non-disclosure agreements are used to protect information that is critical to a startup's market dominance and strategic edge from slipping into the hands of competitors and used against them.
Agreement to minimize the risk of legal disputes
If any sensitive material is unlawfully revealed without an NDA in place, the startup may be forced to endure further litigation, waste more time, and lose more money in an attempt to recover its losses or secure the disclosed knowledge. On the other hand, the transparency that follows putting down both participants' intentions in black and white in advance typically cuts down on the amount of time that it takes a court to reach a decision. Under an NDA, you also have the option of requiring disagreements to be resolved by an arbitration panel rather than through the official court system, further minimizing the amount of time and money spent.
What information does the NDA protect?
As previously stated, an NDA is mainly used to protect classified information that is generally also profitable in some way, such as trade secrets. It is also used to keep the origin and provisions of a proposed settlement with an employee confidential (including the level of compensation payable to discontinue an employee's employment contract or to resolve a workplace conflict) and also to keep the circumstances leading up to an employee's departure confidential. This way, no third party that is not strictly relevant is able to gain access to the origin and provisions of such a settlement with an employee.
An NDA, however, cannot be used to legally prevent (or arm-twist) an employee from speaking to the police or a regulator about concerns involving your startup or its employees. To put it another way, non-disclosure agreements cannot be used to prohibit employees from disclosing workplace malfeasance, often known as whistleblowing. Therefore, a non-disclosure agreement will not be legally enforceable in some situations, such as when an agreement seeks to suppress a whistleblower.
Furthermore, in an instance of dispute settlement, an NDA is unlikely to be legally enforceable if the employee is under unreasonable duress to sign it, such as when the employee is not given adequate time to examine the NDA and/or to receive independent legal advice on the implications of signing it.
The nature of the case will often determine what defines a “reasonable amount of time.” In principle, though, you should provide an employee at least 10 calendar days to examine the conditions and seek legal counsel.
Most non-public information that’s relevant to the inner workings of a startup can be protected by a confidentiality agreement. This can include:
- Classified formulae
- Trade secrets
- Classified software
- IT (Information Technology)
- Scientific research
- Copyrighted material (e.g., your logo and a tagline)
- Current product-related/business-related items or those under development (e.g., engineering drawings, designs, plans, techniques, or specifications)
- Samples and prototypes
- Patent filings yet to be published
- Potential products/services/practices and technical know-how
- The methods and procedures of manufacturing/product development.
- Marketing information and resources (such as marketing campaigns and projects) as well as sales strategies
- Customer or client information, as well as sales connections like client lists, contracts, and business relationships
- Sensitive information about the company, its operating methods, and its strategies
- Business communications and correspondence
- Information about products and services (e.g., techniques, packaging, hardware, tools, and processes used in product research and manufacturing)
- Employer's test data and test results
- Details of transactions and other financial data (including internal cost information, accounting procedures, cash flow statements, income statements, reports, software, and payroll data)
Employment non-disclosure agreement template
A confidentiality agreement protects information that distinguishes one or both parties (i.e., private information that can be used to readily identify either/both parties). Even so, the information that a confidentiality agreement protects must be stated explicitly.
Here is a free and customizable employment non-disclosure agreement template for your perusal.
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