In this four-part series, writer Polly Brewster explores avoiding common legal mistakes.
The most valuable asset a business has is its secrets, whether that's an algorithm, an organization chart or a revolutionary widget. A non-disclosure agreement could be protecting you or some other entity, and as you're founding your business, it's important to know the difference. Here are a few things to keep in mind when you start making and signing NDAs.
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1. Look back before you look forward. Starting a new venture can make you want to speed headlong toward the future. But tread carefully. You might have signed an NDA with a former employer who could claim your idea belongs to it, says Jeff Ward, director of the Start-Up Ventures Clinic at Duke Law School. “You may not have a copy of it and feel sensitive about asking for one, but be practical, get it and look it over.” That same sense of momentum might also stop you from making the founders sign one to make it clear what can and cannot be disclosed and, more importantly, what inventions, ideas or technology each founder isn't bringing. “Carefully consider what you’ve done in the past or any side projects you’re working on that are not part of the venture,” warns Dana Thompson, director of the Entrepreneurship Clinic at the University of Michigan Law School. “Be clear so there’s no mistaking what belongs to the company and what doesn’t.”
2. Protect before you share. Most startup founders regularly attend meet-ups and networking events and part of the fun is bouncing ideas and concepts off other like-minded people. “And that’s fine,” Ward says, with a caveat that if you share proprietary information and some other founder steals your idea, the protections of trade secret law may not help you in court. “You have to be able to prove that you made reasonable efforts to protect the secrecy of your idea,” Ward says. Showing that you had employees and third party vendors sign NDAs can go a long way toward demonstrating that you've made a reasonable effort.
3. Don't skim the small print. Signing a mutual NDA might seem like a formality but make sure to look closely at what it requires of your startup. “For example, what if you sign an NDA that requires any shared information can only be housed on computers with certain firewalls and security measures,” Ward says. “But then you let your employee use a laptop that doesn’t have those tech specs — then you’re breaching that NDA.” On that same note, make sure the NDA is very specific about any proprietary info you can’t disclose. “Define it as narrowly as possible and set a time limit to avoid an extended period of exposure,” Thompson advises.
4. Don't scare away the money guys. When some startups really gain steam they think their idea is truly the next Twitter and start being overly protective. “It is my experience that too many startups, especially first-timers, are overly paranoid and too quick to pull out an NDA. This turns off savvy investors,” says Bob Cooper, chief marketing officer at Zonoff, a software technology platform, who spent seven years as an advisor to venture capital firms. In addition, most venture capitalists and angel investors sit on numerous boards and can’t be liable for broad NDA agreements. If you’re still worried, then make sure to vet any potential investors. “Develop relationships by referrals from an attorney or another startup that’s doing well,” Thompson suggests. “If you’re in an accelerator or incubator, ask around for background on different investors in your area.”
5. Think about including an attorney's fee provision. Landing a contract or partnership with a big company is a startup’s dream, but don’t let the stars in your eyes stop you from considering the future. If they ask you to sign a broad NDA, ask for an attorney's fee provision. “If you’re a small start-up, you’re bootstrapping yourself and if you have to litigate against a large corporation—you won’t be able to afford it,” Ward says. “A properly drafted attorney provision will state that if you’re in the right, that company covers your attorney’s fee.”