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Mutual Non-Disclosure Agreements AKA “NDA” A mutual non-disclosure binds both parties to confidentiality.
What is NDA?
If you’re an entrepreneur seeking investment for your startup, you may be wondering about the role of nondisclosure agreements (NDAs) in the investor-founder relationship.
Nondisclosure agreements are legal contracts that prohibit one or more parties from sharing confidential information with third parties.
In the context of startup investing, NDAs are often used to protect a startup’s intellectual property, trade secrets, and other confidential information from being shared with competitors or other third parties.
However,
The use of NDAs in the context of startup investing is a somewhat controversial issue.
Some investors argue that NDAs can hinder the due diligence process, which is a critical part of the investment process, while others argue that NDAs are necessary to protect sensitive business information.
In this article, we’ll take a closer look at the role of NDAs in startup investing and what entrepreneurs need to know about them.
NDAs typically include the following elements:
1- Definition of Confidential Information
Sutter Law has been using our legal expertise to review NDAs since 2011. There are several terms that an experienced attorney can help a startup understand about NDAs before they are signed.
The information that is bound to confidentiality is all information that the parties exchange. It is important to take note of the specific definition of what “information” includes, as written in your NDA.
2- Intellectual Property Ownership
A great concern for any company is to maintain full control and possession of its intellectual property. It’s important to specify whether or not the disclosure of confidential information would disturb the ownership of intellectual property. Having your attorney review the NDA is essential. It’s preferable for any startup to include a provision that explicitly states that confidential information remains the Disclosing party’s property.
3- Governing Law
The governing law section is not one to skip over. By signing the non–disclosure agreement, you consent to be sued in the state specified in the clause, if a legal dispute shall arise. If this state is not the state where your attorney is located, you will have to hire a new attorney and this Jurisdiction.
4- NDA Enforcement
Before you disclose your startup corporation’s confidential information you should be aware that you need resources to enforce your agreement. This means you will need a legal ‘war chest’ to pursue any violators. Even with an NDA, you should be very careful who you share your confidential information with. A good attorney will tell you that, as a general rule you can show someone WHAT your product does, without showing HOW it works. The HOW is what you want to protect.
5- NDAs and Investors
Experienced attorneys will tell you that typically Angel or Venture Capital (VC) investors will not sign an NDA.
Investors are pitched startups all day long; the investor’s attorneys fear that if they sign an NDA from each startup they will be exposing themselves to significant legal risk.
Since investors will not sign an NDA you should be careful to protect your HOW and focus on WHAT your startup does.
If the investor wants more information you may want to add them to your Board of Advisors.
The advisor will typically sign an NDA and Intellectual Property agreement.
It’s important to note that NDAs are not foolproof, and there are limitations to their effectiveness.
For example,
An NDA may not be enforceable if the information in question is already in the public domain or if the recipient of the information can demonstrate that they already had knowledge of the information prior to signing the agreement.
Alternatives to NDAs
Given the potential drawbacks of NDAs, some entrepreneurs and investors are exploring alternative ways to protect confidential information.
One popular approach is to use a “virtual data room” to share sensitive information with potential investors.
A virtual data room is a secure online platform that allows entrepreneurs to share confidential information with potential investors while maintaining control over who can access the information.
Another alternative to NDAs is to rely on patents, copyrights, and other forms of intellectual property protection to safeguard proprietary technology and other confidential information.
While these forms of protection may not be foolproof, they can provide some level of protection for entrepreneurs without requiring them to sign NDAs with every potential investor.
Conclusion
In conclusion, NDAs can be a valuable tool for protecting confidential information in the context of startup investing.
However, entrepreneurs and investors need to weigh the benefits of NDAs against the potential drawbacks, including hindering the due diligence process, limiting the pool of potential investors, and creating legal headaches.
Alternatives to NDAs, such as virtual data rooms and intellectual property protection, may be worth exploring for entrepreneurs who want to protect their confidential information without limiting their investment opportunities.
If you would like to set up a free consultation with an experienced San Francisco and Silicon Valley business law attorney, please reach out to us at Sutter Law.
