Author: Daniel, Co-Founder of LawCanvas
By LawCanvas
The NDA is an agreement most entrepreneurs have heard of before. But do you know why you should have one and when is it appropriate to use it?
Let's say you've found a potential partner to produce your product, and you've been invited to his office to discuss further. In order for your discussions to be meaningful, you're going to have to disclose some of your confidential product information. But it seems like such a hassle to create this NDA document that you're not familiar with. In addition, this potential partner has engaged with you courteously and seems like a trustworthy guy. Asking him to sign a NDA might seem a bit rude. Is it really worth the trouble? Well, if you're concerned over protecting your confidential information, it is definitely something to consider.
Why should you have one?
Non-disclosure agreements (NDAs) are used when businesses or individuals want to disclose information to other collaborators such as contractors or potential business partners. NDAs help to define what is considered confidential information, what obligations that the party receiving the confidential information has, and if there are any exceptions to these obligations. It is most useful as a tool to manage expectations between the collaborators over the treatment of confidential information.
When to use it?
If the disclosure of your confidential information to external parties could cause you commercial harm, then having a NDA prepared could be crucial. Without a NDA, the only potential consequence that your counterparty faces for misusing your information is a spoiled relationship with you. Putting your confidential information out in the open and expecting it to not be misused could be said to be like leaving a plate of chocolate chip cookies in a room filled with children and expecting it to still be there when you return. Having said that, NDAs do have their limits and it is wise not to share more information than what is strictly necessary.
When should you NOT use it?
On a more practical note, NDAs are more frequently used with contractors or potential business partners rather than investors. Asking investors to sign NDAs could potentially backfire on you. According to Wil Schroter, a co-founder and CEO of Fundable.com, asking potential investors to sign an NDA could make them believe that you don't know what you're doing.
Mark Suster from Upfront Ventures also notes: "We don't sign NDAs because it would be too time consuming to read and process them all, because we could never track all of the ones we've signed and because we see so many companies of which many are competitive. If we signed NDAs we'd constantly be in a litany of accusations every time we funded a company. It is highly likely that when we fund a company we saw some of the competitors."
By stressing the secrecy of your idea you may leave an investor with the impression that you believe ideas in themselves are valuable, or even that you can only come up with this one idea and that it is the best idea of your life. Not recognizing that ideas are just that - ideas, and that value stems from execution of the idea instead weakens your credibility immensely.
The NDA is definitely an important document for startups and small businesses, however do use it selectively. Beyond ideas, it is more important to protect the nuts and bolts of how your product specifically works. If used properly, the NDA can help to prevent others from using what's really yours.
The LawCanvas app provides Non-Disclosure Agreement templates for businesses, and allows you to easily customize the clauses for your company's use. We're helping businesses to save time on legal stuff so that they can get back to building products and delighting customers.
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