What is a non-disclosure agreement for start-ups?

If you’re a founder or co-founder of a start-up and you’re getting ready to scale, it’s a good idea to familiarise yourself with non-disclosure agreements (NDAs) and their varied use cases. You’ve likely spent a great deal of time and energy developing your ideas into a viable product offering, so you must preserve the ability to protect your ideas as your business grows. 

A common question is, “do I need a lawyer involved for a non-disclosure agreement?” We’ll take a closer look at this, as well as the function, form, and application of NDAs. Generally speaking, a legal professional should be involved in the process.

What is a non-disclosure agreement? 

A non-disclosure agreement is a document that lets you share sensitive or confidential information with others while still protecting your information, intellectual property, ideas and trade secrets. IP Australia defines an NDA as “a legal contract, which should be used when sensitive information needs to be shared between two parties.” 

This high-level definition is a great way to think about their function. Take the following example:

Frank is the co-founder of Rocket Fuel Energy Drinks. The company is considering bringing on a consultant to help with marketing. Still, for their top 3 choices to develop a pitch, the company needs to share confidential information with the consultants. Frank has each consultant sign a non-disclosure agreement before providing a detailed background. The consultants can develop an in-depth pitch, and Rocket Fuel Energy Drinks chooses the most appropriate fit for the role. 

When hiring employees, you should also be aware that confidentiality clauses can also be built into employment agreements or employment contracts. You can think of this as a ‘mini-NDA’ and it serves the same purpose – protecting your company and its confidential information. 

If you’re wondering how an international NDA would work, the answer is much as described above. Suppose you know from the beginning that the non-disclosure agreement must cover international borders. In that case, it’s advisable to make sure the contract includes governing law (i.e. under which country’s laws will the NDA’s stipulations apply).

Why do you need an NDA? 
We’ve established that a non-disclosure agreement is an excellent way to protect confidential information, but many uses fall under this category. So, what are some NDA purpose examples? Consider them an option: 

• To protect software source code

If your company is rolling out new technology, your source code is a prime target for competitors.

• To protect Intellectual Property from employees or third parties
  

While most employees operate in good faith, it’s still wise to ensure the rules are clearly set out so your staff knows what they can and cannot share. 

If you also collaborate with other businesses, or need to disclose confidential information to suppliers or consultants – for example, customer lists, pricing lists, trade secrets or other sensitive commercial information – an NDA protects your company and allows for worry-free collaboration.

• To provide long-lasting protection of confidential information
  

It’s worth noting that there are no time restrictions on an NDA. A well-written and legally binding NDA can last forever if the terms are set out as such.

• As an alternative to patent protection
  

With no expiration date and the opportunity to customise the document to your company’s needs, a non-disclosure agreement can be an appealing alternative to filing for a patent. 

Who needs an NDA?

Now that you’re familiar with the uses, you may be asking, “Do employees and co-founders sign an NDA?” and “When should I ask someone to sign an NDA?”

Generally speaking, you should think about having a signed non-disclosure agreement in place whenever you are sharing confidential information. This might be when working with your suppliers, negotiating with a new supplier or service provider, dealing with product resellers, or on-boarding consultants for a variation of reasons. 

Another scenario that requires an NDA is during potential capital raises or proposed sales or acquisitions. During these processes it’s common to share information in order to entice your investors, buyers, or sellers. If the deal falls through, you need to ensure your confidential information stays that way. 

What do I need to know before signing? 

There are a few things you should understand before signing an NDA: 

1. Some non-disclosure agreements go on in perpetuity. Check if the agreement you’ve been asked to sign is indefinite or has time constraints.
2. Illegal acts covered by non-disclosure agreements: as with all legal contracts, an NDA is not enforceable in relation to illegal activity. This means, for example, that you cannot be penalised for breaking a non-disclosure agreement if you engage in whistle-blower activity. 
3. NDAs come with many exceptions. If disclosure is required by a court of law, or if the information in question has become publicly available independently – without any involvement from the person who signed the NDA – there will be no breach of the NDA.
4. Typically, an NDA includes an indemnity clause which requires the person in breach of the NDA to compensate the company or individual who provided that information for any loss or damage suffered as a result of the breach. This indemnity is generally unlimited. That means that breaching an NDA can result in liability for an unlimited sum in damages – a hefty bill that no one wants to see. 

How can an NDA be broken?

You may be wondering how effective non-disclosure agreements are and when someone can break an agreement. Termination can be particularly complex. 

While an NDA should include a specific termination clause, the signing parties are often bound by the confidentiality time constraints regardless. For example, suppose you choose to terminate your agreement that stipulates a 5-year confidentiality clause. In that case, you will usually still be required to hold any information you received as confidential for that 5-year term. 

If you choose to break a non-disclosure agreement because you’re not being paid or for any other legitimate reason, you are still subject to the terms of the agreement and may face legal action as a result. 

At any rate, if you need to end an NDA, it’s strongly recommended you engage legal assistance. 

Summary

A non-disclosure agreement is an important document that can protect your business in perpetuity. These agreements can be used to shore up trust between employees and founders, protect trade secrets, and allow consultants and third parties to provide services to your company. 

Don’t risk your business with a DIY template or an auto-generated legal document. Our team of expert commercial lawyers will tailor bespoke legal documents to suit your needs and prioritise the commercial considerations for your business’s success.