What is a Non-Disclosure Agreement (NDA)?

A Non-Disclosure Agreement, commonly referred to as an NDA, is a legally binding contract that establishes a confidential relationship. The parties signing the agreement agree that sensitive information they may obtain will not be made available to any others.

For a founder, this is often the first line of defense when discussing your startup with outsiders. It is the legal mechanism that turns a conversation about your proprietary technology or business model into a protected exchange. However, new entrepreneurs often misunderstand when this document is necessary and when it is actually a hindrance to doing business.

At its core, an NDA identifies specific information as confidential. It prohibits the receiving party from using that information for any purpose other than what is specified in the agreement.

There are generally two types of NDAs you will encounter in the startup world:

• Unilateral NDAs: These are one-way agreements. Only one party is disclosing confidential information and the other party agrees to keep it secret. This is common when you are hiring a consultant.
• Mutual NDAs: These are two-way agreements. Both parties anticipate sharing confidential information. This is common when two companies are discussing a potential partnership or merger.

The agreement will typically outline what constitutes confidential information, how long the confidentiality obligation lasts, and the exclusions. Information that is already public knowledge or independently developed is usually excluded from these restrictions.

There is a specific nuance regarding NDAs that trips up many first-time founders. You generally should not ask a venture capitalist or angel investor to sign an NDA before pitching them.

Investors see hundreds of pitch decks a year. Many of these ideas overlap or compete. If an investor signed an NDA for every pitch, they would expose themselves to constant legal liability and would be unable to operate effectively. Asking for an NDA before a first meeting signals a lack of understanding of industry norms. It can prevent you from getting the meeting at all.

Instead of relying on an NDA for investors, you should rely on the strength of your execution and keep the deep technical secrets out of the initial pitch deck.

It is vital to distinguish between keeping a secret and owning the work. An NDA keeps information private. It does not transfer ownership of what is created.

If you hire a software developer, they need to sign an NDA so they do not steal your trade secrets. However, they also need to sign an Intellectual Property (IP) Assignment agreement. The IP Assignment ensures that the code they write belongs to the company, not to them.

Using one without the other leaves a gap in your legal armor. You might end up in a situation where a contractor keeps your secrets but legally owns the code they wrote for your platform.

While investors are usually exempt, there are clear scenarios where an NDA is mandatory for protecting the value of your business.

• Hiring Employees and Contractors: Anyone working on your product must sign one.
• Vendor Negotiations: If a vendor needs access to your customer lists or proprietary data to give you a quote.
• M&A Discussions: If you are selling your company, you will open your books to a potential buyer. An NDA is critical here.

An NDA is a tool to facilitate trust. It allows you to share the necessary details to build your business without losing your competitive advantage. The key is understanding that a contract is only as useful as your willingness and ability to enforce it.