From the November 2004 issue of Entrepreneur

According to a Spanish proverb, "Secrecy is the soul of business." You may not have the recipe for Coca-Cola or KFC's 11 secret herbs and spices, but even data as mundane as a customer list can merit protection. For the entrepreneur who wants to preserve a competitive advantage, confidentiality can be key.

Obviously, the safest course is to reveal nothing. At times, this works. Playing things close to the vest is the default position in any negotiation. At other times, it's simply impractical. You may be able to postpone certain disclosures until you've reached an agreement in principle. But there comes a moment when one party must drop their drawers. Otherwise, the deal just will not close.

Thus, a savvy entrepreneur may insist on a nondisclosure agreement. In its simplest form, it will specify what the secret is and who gets to know it. As we know, however, in real-life deal making, things are never that simple. Ask yourself:

  • Which information is confidential? Of course, if you're the one disclosing, the broader the definition, the better. On the other hand, if you're the one receiving the information, that all-encompassing definition can come back to haunt you. As the recipient, you should not have to hold in confidence information that has become publicly available, information you already have, information you got from someone else, information you develop on your own, and information that you may be required to disclose by law. Requiring the other side to clearly mark what is confidential is also a good idea.
  • To whom can you disclose it? Business deals are usually team affairs with partners, spouses, lawyers, bankers, agents, accountants and all manner of winged fowl and creeping things on each side. Naturally, if you've got the secret, the fewer people who know, the better. But in real life, you will have to be flexible. Create a list of permitted "disclosees," such as officers, directors, partners, employees, affiliates, agents and representatives of the interested party who need to assist in evaluating and making the deal. Consider taking this one step further by requiring that each one of these individuals also sign a confidentiality agreement.
  • How long is it to be kept secret? Over time, certain information, like financials, gets stale. Certain information, like trade secrets, does not. As the recipient, the longer you have to maintain confidentiality, the better your chances of slipping up, saying something you shouldn't have, and exposing yourself to liability.

Finally, make your confidentiality agreement a separate document. For one thing, it will allow you to negotiate secrecy before revealing anything. And if you end up having to enforce your rights in court, you'll have a better chance with a separate agreement than with one that is part and parcel of a larger deal.


A speaker and attorney in Los Angeles, Marc Diener is author of Deal Power.