When to Use Non-Disclosure Agreements?

Non-disclosure agreements (NDA) generally present a mixed bag.  At first glance, they seem to be a powerful tool for the entrepreneur.  Many startups will take any and all steps possible to protect their intellectual property or other proprietary information – sometimes this can be the basis for their entire company or business model.

Naturally, this extends to the normal course of business, where they can feel compelled to have partners, employees, officers, and potential employees sign NDAs – all in the name of protecting the information.  There are times when this is absolutely valid, such as with scientific or medical discoveries, complex algorithms, or sensitive intellectual property.

However, one must be careful to not overvalue the concept of your idea, as overdoing it with NDAs can be a costly mistake.

Reasons to refrain

Counter-intuitively, not protecting your idea with an NDA might be beneficial in many ways.

  1. You can get valuable feedback regarding your market segment and opportunity.
  2. You can gauge consumers’ interest and excitement.
  3. You can learn what features your consumers want through feedback and user surveys.
  4. You can improve your sales pitch and value proposition.
  5. You can discover if your idea is terrible and a waste of time.
  6. Perhaps most importantly, most investors will refuse to sign NDAs at early stages, so by asking them to sign one, you (1) show your distrust, (2) show your inexperience, and (3) potentially get rejected altogether.

As Martin Zwilling succinctly states here: http://www.forbes.com/sites/martinzwilling/2012/05/20/startups-are-all-about-the-execution-so-tell-me-how/, startups are all about the execution.

Components

Once you’ve decided how judicious you want to be with your NDAs, it’s important that you recognize the components of a thorough one.  Here are some provisions that may or may not be included:

  1. Is your NDA going to be mutual or only one way?
  2. A definition of the information to be protected from disclosure.
  3. A definition of the limited purposes for using the confidential information.
  4. Exceptions where disclosing the information is acceptable.
  5. A prohibition of reverse engineering.
  6. Non-solicitation of your company’s employees or customers.
  7. The length of the confidential period.
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