Definition of NDA
A non-disclosure agreement (NDA) or a confidential disclosure agreement
(CDA) is a legal contract that protects entrepreneurs against the theft of their
intellectual property since sensitive information may be disclosed over the course
of a meeting or presentation with potential investors. This extensively written
document shields an outsiderâs access to non-public business information and
entails every imaginable form of confidential information concerning an entrepreneurâs
discovery or invention.
The importance of confidentiality
It is critical for the entrepreneur/inventor to consider confidentiality
when approaching potential investors or individuals for assistance in developing
ideas. This is not to suggest that all duties of confidence cannot occur in the
absence of such a contract; however, an NDA should be implemented for the protection
of the entrepreneur. If vital company information is disclosed without the security
of this contract, the information obtained can be given to anyone outside of the
company, including competitors. In addition, a public disclosure of secret/sensitive
company information can prevent the filing of a patent application for that particular
invention/discovery as well as claiming trade secret protection. This will leave
the inventor with no rights unless the disclosure was made âin confidence.â
The wrong time to present an NDA
Often times, entrepreneurs request investors to sign an NDA far too early
in the investment process, usually during their first meeting before a business
plan is presented or even before they reveal their company name. Most angel investors
are hesitant about signing one so early because a large number of entrepreneurs
approach them each year with similar ideas. Angels do not want to take the risk
of inadvertent disclosure where they can open themselves up to potential litigation.
Early signing of NDAâs will also limit the amount and type of deals in their
portfolios. On the other hand, some angels, who look at only a few deals each year,
may be willing to sign an NDA earlier in the process; however, entrepreneurs should
approach each investor encounter the same way and not depend on relying solely on
these types of investors to sign their deal.
Entrepreneurs are encouraged not to present an NDA in the first meeting with their
investors. Instead, their initial presentation and business plan should be tailored
to exclude actual intellectual property or confidential information, but reveal
enough to entice prospective investors into further evaluation of the company. Many
angels firmly believe that entrepreneurs should be able to convey their ideas and
opinions without giving away secret facts. Furthermore, business owners should be
aware that disclosing too much information will not advance a business deal nor
will it successfully gauge interest in probable investors.
A bad sign
Some companies are distressed about their ideas being stolen and become
overly sensitive and extremely protective about sharing such information. Since
these business owners have become so preoccupied with this fear, they actually commit
more harm than good for their company. The immense fear that their ideas will be
stolen hinders the development of their business because they fail to promote their
products and services, and as a result, the company ends up not selling anything
and even ends up losing money. When business owners become too secretive with their
angel investors, it is considered to be a bad sign.
The right time to present a NDA
Only in exceptional circumstances or during the due diligence process will
angels consider signing an NDA. Any period before the due diligence process is considered
premature. Any patents that are pending and disclosures with attorneys will also
be exposed during the due diligence process.
The importance of an attorney
An entrepreneur should seek the assistance of an attorney who can prepare
this document for them. It may be challenging to create a non-disclosure agreement
that complies with the entrepreneurâs need for protection while not being
overly secretive to investors. In addition, if the NDA prepared is too complex to
understand, then the investor is encouraged to have their attorney review and explain
it to them before they sign the agreement.
Points to consider when using an NDA
First, it is highly recommended that an entrepreneur/inventor consult with
a patent agent about the protection of their ideas and the risks of communicating
these ideas to an outside party (people or groups outside of the company). Second,
the NDA should serve both the entrepreneur and investor(s) interest(s). It should
be read carefully and legal advice should be pursued for proper understanding of
the agreement. Lastly, both parties should be aware that there exists no set formula
for an NDA. For the entrepreneur and investor, each agreement may be presented differently
with every new investment endeavor since each applies to different circumstances.
Conclusion
Business owners should always make sure to protect their intellectual property,
including all proprietary and confidential company information. They should not
disclose any restricted information to outside sources without the provision of
a non-disclosure agreement for all involved participants, including their potential
investors. A partnership requires a high degree of mutual trust, and an entrepreneur
can protect himself/herself from such issues by having an NDA prepared by their
attorney during the due diligence process.