Non Disclosure Agreements: Keeping your ideas confidential
As an entrepreneur looking for growth opportunities for your business you will no doubt want to shout about your great idea to anyone who will listen. You will likely be in talks with manufacturers, suppliers and others in your immediate supply chain or wider sector. In these conversations you may be concerned about protecting the confidentiality of your great idea so as to stop others benefiting from your hard work and cutting you out.
The only way to guarantee information remains confidential is not to disclose it in the first place. However, this will not always be possible, or indeed practical.
The best way to ensure information you disclose remains confidential is through a written contract more commonly referred to as a confidentiality agreement or a non-disclosure Agreement (NDA). Ideally, an NDA should be entered into before you disclose any information to ensure the NDA captures all disclosed information. An NDA is preferable to any oral agreement as it is easier to rely on the NDA to evidence the exact obligations of the parties and the date it took effect.
An NDA should always include a certain number of key provisions:
- A definition of the confidential information protected:
This should be broad enough to include any inadvertent disclosure you may make, together with any material or products that derive from your disclosure.
- The use for which the party receiving the confidential information can use it:
You would want this to be clearly defined and limited to only the uses you envisage. This should also include those people the receiving party may make onward disclosure of your information to, such as employees. It is generally considered too onerous to ask that those employees each sign an NDA, but rather it is generally reasonable for the party receiving the confidential information to take responsibility for breaches of confidentiality by its employees or advisers. Disclosures required by law and regulation should always be permitted.
- What will happen if the deal doesn’t go ahead:
You should look to include provisions for any confidential information to be returned or destroyed.
- Duration of the NDA:
The NDA should specify how long it is to have effect. This could be set in relation to a specific date, such as 2 years from the date the parties stop working together. Ultimately, determining the duration of the NDA is a commercial decision and should be related to how long the information remains commercially sensitive.
What about when it comes to discussions with potential investors – should you always ask a potential investor to sign an NDA?
Whilst an NDA can be a valuable instrument in maintaining the security of your confidential information, the need for one should be measured against the commercial detriment in asking a potential investor to sign up to one. It is likely that any potential investor will want to understand your entire business, including those valuable trade secrets, designs or business models, before deciding whether to part with their cash and invest in your company.
Typically, investors will not want to be confined by an NDA as it may prohibit them for considering other investment opportunities in the same sector. Furthermore, from a presentational perspective, if you open discussions with potential investors by asking them to sign an NDA in circumstances when it’s not appropriate, you may come across as inexperienced, which is not particularly appealing and may deter any interest away from your company. This is where doing some due diligence on your potential investors, understanding who they are and how they’ve become interested in your company, becomes key.
There will be times when asking a potential investor to enter into an NDA is appropriate but that will not be each and every time you’re talking to potential investors. When considering whether you need a potential investor to enter into an NDA always consider:
- Is the confidential information so sensitive (such as a formula) that it should always require an NDA?
- What use could the potential investor make of the confidential information without an NDA in place?
- Is the potential investor a sophisticated and trusted business/individual?
- What is the business relationship you hold with the potential investor?
- Have you done your due diligence on your potential investor?
If you’re unsure whether an NDA is suitable or not, please contact Kirsty Simmonds, or you can call us on 0345 070 6000.