A non-disclosure agreement (“NDA”), often also referred to as a confidentiality agreement, creates a legal obligation between parties to secure that certain confidential information that will be exchanged remains protected. An NDA defines why certain information will be disclosed and which information should be considered confidential.
Below, we will discuss some key points included in NDAs and some problems that may arise while discussing an NDA.
The description of the purpose for disclosure of certain confidential information forms the basis of the NDA. An NDA may, for example, be used during discussions regarding a joint venture or an acquisition of a company. It is important that this purpose is clearly defined, as it determines for what purpose the receiving party may use disclosed information and which persons will have access to the information.
The type of information that is subject to secrecy is unlimited. Any exchanged information may be considered confidential, e.g.: trade secrets, know-how, inventions, (test) data, financial information, business plans, suppliers, customers, licensees, strategic partners and employees.
It is important that an NDA clearly outlines which information will be disclosed and which information is considered confidential, so that it is clear that parties agree that the confidential information is secret, valuable and protected by the terms of the NDA.
Disclosure of confidential information to employees and third parties
Usually, the disclosing party will only want confidential information to be disclosed to persons that “need to know”, such as employees of and other individuals related to the receiving party that are involved in the negotiations regarding the purpose (such as legal and financial advisors). Keeping the circle of individuals as small as possible, might benefit the disclosing party in case any information is leaked.
An NDA only protects the way in which confidential information is used or published between the parties to the NDA. Thus, it is of importance that there also is agreement regarding the exchange of confidential information with and the liability for information revealed to third parties. In principle, the receiving party will be liable for third parties to whom he will disclose the confidential information from the NDA and thus, NDAs often include either that the receiving party is jointly and severally liable for any failure of a third party, or that the receiving party is obliged to discuss adequate confidentiality obligations with the third parties that will be involved.
Term of the NDA
It is useful to set a final date to the obligation to keep the disclosed confidential information secret. The term after which all duties cease is often set at two, three or five years. However, it is important to keep in mind that the obligation to keep the confidential information secret might survive the end term of the contract. According to Dutch law, a party may still be liable for any confidential information revealed after the end of the contract regarding this might constitute an unlawful act.
Information that already is publicly available, rightfully received by the receiving party from a third party or already known to the receiving party before disclosure on the basis of the NDA, often is excluded from the definition of confidential information. Moreover, an NDA should include that parties agree that none of the provisions in the NDA will preclude any obligations that rest on the receiving party due to certain laws and regulations such as the Dutch Financial Supervision Act and Personal Data Protection Act or due to any court order.
NDAs will often also include a penalty provision, determining that if the receiving party breaches any provision of the NDA, the receiving party will need to pay an immediately payable penalty to the disclosing party. The provision acts a as a nice potential stick to hit with and will discourage the breaching of the confidentiality obligations. Moreover it is often rather difficult to prove damages have been suffered in the event of a breach of an NDA, and accordingly the penalty clause then makes it easier to receive compensation.
NDAs in the startup environment
While you might want to use an NDA to protect the innovative ideas of your startup, it is relatively unusual to ask a potential investor to sign an NDA. An investor might even decide that you did not do your homework on the startup environment and cut you off before you even had the chance to pitch to them.
There are several reasons why investors usually do not appreciate startups asking them to sign an NDA. First, investors invest in promising startups with innovative ideas and do not invent, develop or manufacture. They receive numerous pitch decks of startups each year. Signing an NDA with every startup is simply impractical as it would require the investor to monitor all of these (different) NDAs. But furthermore, disclosing or stealing innovative ideas from the startups that approach them would also destroy the investor’s reputation and credibility.
Thus, it is not just important to do your own due diligence on a potential investor in order to decide and substantiate why that investor is suited to invest in your startup, but also in order to assess whether the investor is trustworthy. Finally, an investor might be prepared to sign an NDA further on in the process, once more certainty on the prospective investment is reached and once more elaborate information is shared of which it is justified that the confidentiality is safeguarded.
Prepare your own NDA!
We hope the foregoing information will benefit you in your negotiations regarding an NDA. Also, do not hesitate to directly use your (newly gained) knowledge and prepare your own tailor-made NDA with our free contract generating robot BEN at http://www.benvalor.com/en/ben/.