A Non Disclosure Agreement (NDA) is an essential legal document for your startup. During your startup journey, you are going to be speaking to a large number of people about your idea, aspirations and what makes your business unique. While an NDA ensures your idea remains confidential, there will be circumstances where it is not appropriate nor necessary. We explain below when you should and shouldn’t ask someone to sign an NDA.
What is an NDA?
An NDA (also referred to as a Confidentiality Agreement), is a legal contract which protects your startup’s confidential information from becoming public or being used in a damaging way. A well-drafted non disclosure agreement can specify what information you don’t want the other party to disclose and what the consequences are for breaching the agreement.
NDAs are commonly drafted to protect:
- Business plans, methods and ideas;
- Intellectual property;
- Trade secrets;
- Financial information;
- Marketing and capital raising plans; and
- Customer and supplier lists.
An NDA prevents a party to it from using such information for their personal gain or competing with your business. Most NDAs are drafted as ‘mutual agreements’ meaning that both parties agree not to disclose or use inappropriately, the confidential information of the other party.
Co-Founders and Business Partners
A business partnership is not going to be effective without mutual trust, but do you also need an NDA between your business partners?
Startup co-founders may have been so inherently involved in the business’ development that it would seem inappropriate to ask them to sign an NDA. A shareholders’ agreement, which sets out the rights and obligations of the co-founders, may be more appropriate.
However, there are circumstances where an NDA may be suitable. For example, you might have a great and unique business idea, but you require a founding partner with the technical skills to make it happen. If you need to speak with multiple people to find the right fit to get your business idea off the ground, an NDA may be appropriate.
Employees and Contractors
When finding the best people for your startup, you may need to disclose information about your business which you want to keep confidential. You should use an NDA when communicating sensitive information to potential employees and contractors for the purpose of recruitment.
Once you have found the right person for the job, Employment or Contractor Agreements will provide your business adequate protection moving forward. These agreements will include intellectual property, confidentiality and non-compete/restraint of trade clauses which should adequately protect your startup as it grows and changes.
It is highly recommended that you have a developer sign an NDA before working for you if you plan on briefing them in a way that discloses your trade secrets before they are employed. However, a developer can see an NDA as a sign of distrust.
When speaking with developers, you should consider whether there is a way you can discuss your idea without giving too much away and therefore not need an NDA at all. This communication method can help start the relationship out on the right foot without any ill feelings.
Once you decide on a developer, you would then ask them to sign a developer contract (such as an App Developer Agreement), and this will be sufficient to protect your confidential information.
Do you need to ask your lawyer to sign an NDA? Rest assured this is not necessary when dealing with legal professionals. Lawyers in each Australian State and Territory are obliged to follow strict rules that require them to protect their client’s confidential information. A breach of these rules can have severe consequences for a lawyer, and consequently, an NDA is not necessary.
If your startup offers products or services in a way that discloses your confidential information, you may also need an NDA to protect your intellectual property, ideas and business model. You can ask that a client signs an NDA before you provide them with the goods or services but this is not very common. When providing goods and services, you should have appropriate terms and conditions in place which include any relevant intellectual property protection and confidentiality clauses.
When it is time to start raising capital for your startup, you should be particularly careful about when and when not to use an NDA.
The first capital raising round for startups is often referred to as the ‘friends and family round’. When reaching out to friends and family for investment, it would be appropriate to ask them to sign an NDA if you were disclosing confidential information about your business.
Again, this is a situation where you want to be careful not to put anyone off. Ensure you clearly explain your reasoning behind asking your friends and family to sign an NDA and again, consider first whether you should disclose any confidential information to make your pitch.
As your startup grows, you may have another capital raising round with investors. It is not appropriate to insist that a sophisticated angel investor or professional investor representing a venture capital firm sign an NDA. Sophisticated and professional investors see innumerable pitch decks every day and may already invest and sit on the board of a similar business.
The NDA would prevent the investor from using your information to compete with you by entering into business arrangements with your competitors, customers, employees. Sophisticated investors are rarely in the business of stealing ideas! It is unlikely that they would be able to comply with the terms of the NDA and still do their job. By asking an investor to sign an NDA, you run the risk of them turning you away altogether.
If an investor agrees to invest in your startup, you will most likely issue them equity. This means they can become a party to your shareholders agreement. A well-drafted shareholders agreement will have the relevant intellectual property, confidentiality and non-compete protections that your business needs. Your lawyer can tailor these for a particular type of investor. All shareholders agreements should include these clauses, irrespective of whether you had your investors sign an NDA earlier.
Am I Too Late?
You can request a party to sign an NDA which has been drafted to protect past disclosed information. If this is not appropriate for your circumstances, other legal means may still protect you including:
- Copyright: Automatic protection of creative works that have been written down or documented in some other way.
- Trade marks: Used to distinguish your goods and services from others and once registered it will protect you from other businesses in a similar field stealing or leveraging off your brand. Among other things, you can register your startups business name, logo, app name and slogan as a trademark with IP Australia.
An NDA is an important legal tool to protect your startup both in its development and as it grows. However, you should be careful not to insist that every party you deal with sign an NDA. You should consider each case separately, and always ask yourself, is it necessary for me to disclose my secrets when speaking with this person? If you need assistance with drafting an NDA or have any questions about when it’s appropriate to use an NDA, get in touch with our startup lawyers on 1300 544 755.