What is an NDA?

Image credit: Unsplash

Key Takeaways

A non-disclosures agreement (NDA) recognizes the existence of a confidential connection between two or more parties and safeguards the information that they communicate among themselves. Different types of NDAs include one-sided NDAs, mutual NDAs, merger and acquisition NDAs, and employer-employee NDAs.
An NDA is commonly used before negotiations between firms regarding possible joint ventures.
Employees are frequently made to sign NDAs in order to safeguard the startup’s private business information.
A confidentiality agreement is another name for an NDA.
Before signing an NDA, you should examine the NDA for imprecise and ambiguous language, recognize the scope of the document, understand the repercussions of breaching the contract, and check whether or not there is a liquidated damages clause.
While negotiating NDAs, there are three key things to be kept in mind. Do not divulge any information until the agreement has been signed, collaborate with a professional, and ensure that trade secrets that are core to the startup (think the herb-and-spice blend of KFC) are protected much beyond the NDA's expiration date (preferably indefinitely).
You should probably have an NDA when you’re bringing a new party on board (e.g., an employee, a vendor, or a contractor), when you’re starting a new project, when you’re negotiating with investors, and/or during M&A transactions.
Creating a multilateral NDA is the best method to make most NDA agreements secure (where there are two or more parties concerned) without adding additional complexities. This is because (among other reasons) a multilateral NDA includes a confidentiality clause for all parties; ensures information protection even after mergers, acquisitions, or joint venture talks fail; enhances the ease and speed with which all parties can come to an agreement, and generally ensures finalized terms that are more fair, balanced, and reasonable (than those of one-way NDAs).

Early-stage startups (especially those with a novel and profitable solution) can only prosper if they keep their objectives and ideas under wraps. To maintain a strategic advantage, your startup should keep ongoing projects, creative ideas, and intriguing new products secret, to safeguard them from market rivals.

What does an NDA mean in this context?

A non-disclosure agreement (NDA), often known as a confidentiality clause, is a documented contractual relationship between two parties (people, business entities, etc.) that forbids the revealing of any sensitive information provided to them. In other words, if you sign an NDA, you agree to keep any classified information that you’re entrusted with confidential and not disclose it to others. If you're the one who's issuing the NDA, you're essentially asking someone not to divulge any information about your startup that you entrust them with.

Types of Non-Disclosure Agreements

1. One-sided NDAs

These are NDAs where only one party reveals its classified data to the other party. For this reason, they are alternatively known as Unilateral NDAs.

2. Mutual NDAs

Mutual NDAs provide security to both/all participants against the abuse or disclosure of sensitive information shared with the other party. Every participant in this NDA is bound by confidentiality requirements with regard to any classified information acquired from the other party.

For this reason, mutual NDAs are alternatively known as Bilateral NDAs or Multilateral NDAs.

3. Merger and Acquisition (M&A) NDAs

Startups seeking a private or public M&A typically start by drafting and signing an NDA which prevents one or both parties from releasing any information that is considered confidential.

4. Employer-Employee NDAs

When employees are onboarded, startups frequently request them to sign an NDA. Employees' usage and distribution of company-owned sensitive data are restricted under this sort of NDA. Furthermore, some companies negotiate different NDAs with team members from time to time, depending on the commercial prospects that the startup is pursuing (e.g., a startup forming new business relationships with people or entities could modify the NDA it has with its team members). This is to reinforce the privacy requirements specified in the team member’s contract of employment.

Tips for signing and negotiating NDAs

Tips for signing NDAs

Examine the NDA for imprecise and ambiguous language.

Ensure that the definitions of "private” and “sensitive" information are clearly stated. Be wary of broad and ambiguous wording that unfairly restricts your freedom to discuss and disclose information.

2. Recognize the scope of the document

Consider what the NDA requires you to keep private and for how long. What exactly are you required to do to keep the knowledge hidden? What kind of data are you not allowed to share? For how long do you have to keep the information confidential once you leave?

3. Repercussions of breaching the contract

Be careful of consequences that are particularly harsh or unjust for violating the NDA. Consider the ramifications of the consequence to the violation, and if the consequence significantly surpasses the violation, it’s time to rethink the signature.

Make sure that the NDA isn't skewed significantly in favor of one party. Avoid signing an NDA that holds you responsible for violations by other parties, such as by your colleagues and other employees, without a counterbalance.

4. Liquidated Damages

If an NDA has a liquidated damages clause, run for your life -- and do not turn back. Without really needing to show that you were the chief cause, an NDA with a liquidated damages clause allows the other participant access to a certain sum of damages payable to them.

The majority of liquidated damages clauses are harsh and go against public policy. Don't hand over an automatic reimbursement to the other party (e.g., your investors) for something you may or may not have done.

Tips for negotiating NDAs

Do not divulge information until the agreement has been signed

While it may be enticing -- especially in early-stage startups used to speed -- to start conducting business while agreements are still underway, releasing intelligence before settling on concrete conditions for the NDA puts your company at risk of information leakage.

2. Collaborate with a professional

There are many free NDA forms available online but it's vital that the contract be suited to your startup's particular needs and circumstances. To guarantee that the document best protects your interests, consult an attorney or utilize a customized NDA form.

3. If feasible, choose a unilateral NDA

As discussed above under “Types of Non-Disclosure Agreements”, an NDA might be either unilateral or mutual.

A unilateral NDA compels the other participant in the contract to keep your data private, but a bilateral NDA compels both parties to keep the data of the other confidential. It's certainly easier to not have to worry about protecting data you get from a prospective business associate if you have a unilateral NDA.

4. Pick a deadline

An NDA cannot be open-ended; i.e., it must have a specified expiration date. Most NDAs run for a period of many years, ensuring that the given information is protected while it is still current (or relevant).

5. Define the term "confidential information"

It's critical that your arrangement spells out exactly what type of knowledge is supposed to be kept secret and is protected by the contract. Although the opposing side would often want this description to be as limited in its scope as possible, you must try to make it as wide in scope as possible in order to give your startup’s data the most comprehensive protection possible.

6. Ensure that trade secrets are well-protected indefinitely

You could be exposing your startup’s core secret -- the proprietary expertise that gives you a significant advantage -- on top of the classified material you’re already disclosing to the other entity during your professional relationship with them. The herb-and-spice blend incorporated by KFC is an instance of such a crucial trade secret.

If you're disclosing trade secrets, you want them to be safeguarded for as long as the knowledge is supposed to be secret; however, the NDA for ordinary sensitive information would have an expiration date as discussed above. Therefore, it’s a good idea to include a provision stating that your startup’s trade secrets will be protected indefinitely.

When should you have an NDA?

You may be required to have an NDA for your startup signed in a variety of situations. Here are a few:

When bringing in a new participant

If you're starting an engagement with a vendor or a contractor (or if you’re bringing them to a meeting) and would like to ensure that the data you provide stays private, then signing an NDA is the best way to go about it. Making each employee sign an NDA is a fantastic concept in early-stage startups, especially those that are information-sensitive. This ensures that even seemingly simple data like plans, anticipated numbers, and finances do not leave the startup’s ecosystem.

When you're starting a new project

Let's say that your startup has progressed through the launching stage and wants to embark on a new venture. Both internal and external stakeholders would typically have to be involved in this. In this case, it is recommended that an NDA be signed to avoid any ambiguity or allegations that may emerge in the future.

When negotiating with investors or during M&A transactions

In the past, signing NDAs while negotiating with investors was fairly commonplace.

Contemporary investors, on the other hand, often refuse to sign NDAs at an early stage, and the approach is becoming outdated. A request to sign an NDA could be made by founders when the discussion has progressed to the point for investors to review documents and look into numbers. The same may be said for mergers and acquisitions.

Why your startup probably doesn’t need an NDA

Slows Things Down

Lawyers tend to slow things down with investigative work and a lot of contracts, so it's critical to introduce an NDA into the picture at the correct moment in your startup's negotiating processes (e.g., negotiating with investors, other companies, etc.).

Even when it comes to the fairly common non-disclosure agreements, attorneys almost never agree on the terms and wording used by other attorneys. As a result, you may anticipate that every time you ask someone to evaluate an NDA, the review process could take a significant amount of time prior to signing.

Patents are also a type of protection

Rather than relying on contractual measures of security, such as hiring a lawyer or signing an NDA, consider what you're doing to safeguard your ideas from the inside. Some businesses have made a significant shift in their strategy for securing confidential information. "Let's seek interim patents rather than non-disclosure agreements" is the new attitude now, since once a tentative patent is lodged, your protection begins.

Perfecting Your Business Pitch

When you pitch, you are not obligated to reveal all of your secrets.

There are certainly a number of methods to talk about the product without revealing anything genuinely confidential. You can “tell the story” of your startup (which generally includes discussing commercial opportunities, market gaps, and, lastly, the product itself). Then, when someone begins to make more detailed inquiries, it is all right to respond with something like, "Some of this is patented, while there’s other stuff that is proprietary. For that reason, it won’t be possible for us to reveal every single element of our how-to just yet. But why don’t we have a follow-up conversation once we've solidified our partnership even further?” Then submit a letter of intent, advance to the next level, and then contract jointly to move ahead. This also provides a great opportunity to perfect your business pitch.

While it's not always easy to strike the proper balance between revealing just enough to pique interest while protecting your ideas from disclosure, if you are able to do it, you could be rewarded handsomely.

How to make sure everyone's protected?

Creating a multilateral NDA is the best method to make most NDA agreements secure (where there are two or more parties concerned) without adding additional complexities.

In addition to ensuring the safety and protection of all parties, a multilateral NDA has a number of other advantages:

Confidentiality clause for all parties

A multilateral NDA ensures that during discussions, all confidential material revealed by any side will be kept private. Even if just one party discloses secret information while negotiations are underway, there is no need to draft a new NDA if the other party unexpectedly chooses to share sensitive information. When a startup seeks funding from investors, for instance, it is frequently required to reveal sensitive data like its IP, areas of distinction, and company profits to the investor. On the other hand, if the investor decides to fund the startup, they will very certainly be required to reveal sensitive data about their financial circumstances and available loan capital -- among other sensitive information -- to the startup.

In such cases, instead of drafting a second NDA, the investor may make disclosures with confidence, knowing that they are also protected by the confidentiality clause of the multilateral NDA.

Mergers, acquisitions, and partnerships that don't work out

A multilateral NDA offers the security that if mergers, acquisitions, or joint ventures talks fail, marketable secret information that has been exposed cannot be used to benefit either side. This security is especially relevant so that participants feel comfortable disclosing information that is required to move discussions forward.

The ease with which you may come to an agreement

Because all parties must adhere to the same freedoms and limitations under a multilateral NDA, negotiating a mutually agreed-upon set of terms and conditions takes less time. This also simplifies and speeds up the bargaining process

Terms that are more balanced, fair, and reasonable

One-way NDAs are often found to be less equitable, fair, and logical than multilateral NDAs.

In the case of multilateral NDAs, however, the drafting party is well aware that it will be bound by the same limitations that it is attempting to impose on the other involved parties. As a result, the finalized terms/conditions are usually found to be reasonable for all parties.

Learn more with us

Access more guides in our Knowledge Base for Startups.

We can help!

At AbstractOps, we help early-stage founders streamline and automate regulatory and legal ops, HR, and finance so you can focus on what matters most—your business.

If you're looking for help with understanding and/or executing NDAs, get in touch with us.

Like our content?

Subscribe to our blog to stay updated on new posts. Our blog covers advice, inspiration, and practical guides for early-stage founders to navigate through their start-up journeys.

Note: Our content is for general information purposes only. AbstractOps does not provide legal, accounting, or certified expert advice. Consult a lawyer, CPA, or other professional for such services.