Protecting Your Start-Up’s Assets: The Non-Disclosure Agreement

For many start-ups, their greatest asset is a game-changing idea. To build the idea into a successful business, they will invariably need to share it with potential business partners, consultants, suppliers, employees, and any number of other third parties.

It seems distracting to think about legalese and paperwork when formative, creative and revenue-generating things are happening, but trust me, the time and distraction are worth the effort.  It is crucial to protect your proprietary business information with a non-disclosure agreement.

A non-disclosure agreement, or confidentiality agreement as it is also often called, obligates the other party to keep your non-public information confidential and to only use it for the permitted purpose, and it gives you remedies, such as an injunction and damages in the event the other party breaches the agreement. Whether or not it ever comes to litigation, to me, the greatest value of a non-compete has always been its psychological effect of signaling to the other party that you are telling them something secret in confidence and that there are serious legal consequences if they violate that trust.

While you will find a myriad of permutations, a basic standard has evolved and the key provisions are straightforward:

  • Definition of confidential information: The agreement must define exactly what information is protected from disclosure.  Make the list non-exhaustive so to include items you may not yet think of when the agreement is signed.
  • Authorized disclosures: The agreement should specify the circumstances under which the information may be shared with others, as well as list the people to whom the confidential information may be disclosed, such as lawyers, insurers, and bankers.
  • Legal remedies: The agreement should set out the remedies available in the event of a breach, which typically include injunctions to prevent further disclosure, liquidated damages, and attorneys fees.
  • General contract terms: The agreement typically has a limited term and will invariably include general terms, such as the governing law, the availability of mediation/arbitration, and assignment and amendment clauses.

I would serve up something evenhanded, meaning that you should be willing to be bound by it as well in the event the other party would like to make it mutual.  Also, don’t forget to put a confidentiality legend/stamp on your slide decks, presentations, business plans, etc.

A solid non-disclosure agreement is only one tool that your start-up should have in its legal arsenal. For additional information about protecting your intellectual property, please check out my prior post, “Protecting Your Start-Up’s Core Assets.”

As always, if you have questions or comments, please call, e-mail or tweet me @Bettina Eckerle.  Also, if you would like to receive my monthly newsletter with more of my postings, you can sign up here.