All business development professionals understand the importance of the NDA (non-disclosure agreement). It’s the legal document they review more frequently than any other.
Think about it: You don’t get to review the confidential information memorandum (CIM) until you execute the NDA. However, drafting an NDA is a complicated process, fraught with the potential for legal pitfalls and misunderstandings. This makes it imperative to learn as much as possible about NDAs as a business development professional.
In the spirit of full disclosure, I’ve used NDAs very often in my line of work. The following is a general guide that I’ve picked up through my time—and not, by any means, a comprehensive how-to for your specific situation. Always consult your attorney before signing legal agreements.
With that said, let’s dive into what you need to know about NDAs:
Context and Scope in NDAs
The biggest area of focus when negotiating NDAs lies in scope. As a business development professional, your goal is to protect your firm from undue liabilities.
An NDA that casts too wide of a net can create problems. By covering too many topics, and setting too long of a time period, you run the risk of your NDA being struck down in court (should the need for legal intervention arise).
Instead, as EveryNDA, a service that creates high-quality non-disclosure agreements, advises, it’s important to have context. For instance, a tight, limited NDA could ostensibly list the selected technologies and practices that they restrict sharing with other companies and organizations, rather than throwing a blanket over everything that a specific employee handled during their time at a company.
As evidence, EveryNDA cites the case of Lasership vs. Belinda Watson. Watson, the employee in question, took a job as a lead dispatcher at a competitor, where she performed the same duties as her previous line of work—and even had contact with her former employer’s customers. Unfortunately for Lasership, their NDA was too broad: in particular, it was found that Watson could not be prevented from contacting (for any reason or in any manner) her former employer’s customers—which the court found to be a vague and unreasonably restrictive provision.
So, what’s the solution?
It’s to keep your NDA tight. Think carefully about what provisions you want to focus on, and don’t try to include everything imaginable (it will be viewed as burdensome by the courts).
As an example, you could refer to American Capital’s guide for crafting NDAs. As they note, an investor should focus on the following:
- Scope of covered information: This should be as specific as possible.
- Exceptions to the scope of information: This could be publicly available info and information received from third parties.
- Scope of covered persons: This should allow for some flexibility with sharing information with colleagues, advisors, funding sources, etc.
- Level of care with information: For instance, there should be limitations on sharing information with competing portfolio companies, but also the ability to comply with government requests for info (i.e. subpoenas and inquiries).
- Post-agreement obligations: This could be the obligation to destroy or return info, as well as the option to extend the agreement if needed.
- Seller-requested provisions: These could include anti-employee recruitment and anti-customer solicitation, standstill provisions, and exclusivity with sponsors.
- Remedies: A well-drafted remedies clause, which includes injunctive relief and an indemnity clause, can prevent much legal headache.
NDAs and Time
When crafting an NDA, you’ll find that time is an important consideration. After all, you can’t limit everything that was developed or discussed before the NDA was drafted or signed, nor can you put a blanket ban on everything that happens afterwards.
Still, there’s a dilemma: set a limit that’s too long, and it won’t be enforceable in court. Set a limit that’s too short, and you could risk competitors making off with your secrets before your company can solidify its advantage.
In all honesty, however, that’s the nature of restrictive covenants: rather than a single standard that’s always advantageous to you (and always disadvantageous to your competitors), every NDA is a balancing act. No single agreement can work every time to ward off any secret; instead, it only has to work most of the time.
So, do your research to figure out what works best.
As the popular law blog Lexology writes, before your company includes a term of protection in your NDA, it helps to find some key facts first. Answer the following questions:
- What applicable state laws cover confidentiality obligation durations?
- What company forms do you need?
- How can you distinguish trade secrets from other information?
- How long can you justify your term of obligation?
Addressing these questions will help you create a more fair time period for the NDA. That will help during negotiations.
As Leland Miklovic, managing director of Opus Capital Partners, states, “We will not move past the first stage of a deal if the banker or broker is not willing to accept changes to an NDA
that is otherwise one-sided and not market-based.”
The lesson here is clear: The time period for the NDA isn’t something to overlook. You must do your due diligence to ensure both sides feel comfortable.
Balancing collaboration and secrecy
A critical (and rarely mentioned) consideration is the need to weigh the benefits of collaborating with companies, versus the advantages that arise from being the sole holder of such property.
This occurs quite often in tech. For instance, as one law group points out, releasing certain technologies as open-source documents can lead to widespread adoption of these devices. Bluetooth and USB are now both very widely used, with a huge range of companies producing devices based on these technologies (and thus, paying countless dollars in royalty fees). This wouldn’t have been possible were it not for the originating company’s willingness to open up their tech to everyone.
Tesla is perhaps the most recent example of this trend. Because electric vehicles are still in their infancy (though they have plenty of promise), there is a chance for Tesla to seize on this burgeoning market and set the hardware standards. For this reason, Tesla’s patents are publically available, allowing the company to grow its market share and spread its technology—especially when it comes to charging stations.
Yet it’s worth mentioning that opening up technologies or ideas to the public in the way Tesla and others have may not always be entirely beneficial to companies. It can lead to competition grabbing your ideas and putting you out of business.
What should be done then to balance collaboration and secrecy?
Again, this can be accomplished through a detailed and specific NDA. Axial, a business development network for middle market CEOs and deal professionals, has a helpful guide called, “9 Clauses to Include in Every NDA,” in which they highlight how to balance collaboration and secrecy.
The team at Axial writes that confidential information should vary based on the specific transaction, and special mention should be made for anything that is trade secrets. Of course, the disclosing party would prefer a broad definition and the receiving party would prefer a narrow definition.
To help strike a balance, and ensure both sides can work together effectively, Axial believes it’s “equally as important to define what is not confidential. For many transactions, some information cannot reasonably be expected to remain confidential, given certain circumstances, and must be outlined in the agreement.”
Additionally, a non-circumvention clause should be added to the NDA. This guarantees each party can use the other party’s information, but can do so only for the purpose of pursuing a business relationship between the parties. Essentially, this ensures your trade secrets can be kept a secret, while still being able to be used freely in the collaboration.
Crafting your NDA properly
The best NDAs are custom-tailored to your unique situation, with clear limits on what cannot be shared, for how long, and with who. Anything else risks a legal challenge—and quite possibly the courts ruling against you.
With the right legal help, thorough research, and transparent negotiation, you can create NDAs that work for you and your partners. This way, you can avoid legal hassles and focus on what matters: closing more deal!