IP Protection Tip #3: More On NDAs

Posted on March 9, 2012

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Article Highlights:

  • Outside of the patent context, a common use of non-disclosure agreements is for protection of business plans.
  • Approach potential partners like you would a date; you do not ask your date to sign a contract on the first date; you go to dinner and a movie; you follow up and then you start asking about the confidential stuff.
  • If the only thing that protects your business is a piece of paper, you have to wonder generally about the viability of the business. In order to sell a product or service, you are going to have to tell people about the product or service without getting a confidentiality agreement.
  • Healthy skepticism is good, but paranoia about theft of a business idea is counterproductive. Your idea is only as good as you make it; get over yourself and get to work building a business.
  • NDAs in the business context should generally be standard; if not, you really need to be asking yourself what is truly going on.

Outside of the patent context, a common use of non-disclosure agreements is for protection of business plans. The business person will want to protect his or her business idea or plan from a competitor or another person from finding out about the business idea and usurping the idea for their own purposes. Additionally, the business plan may have sensitive financial information that needs a non-disclosure agreement in place before being shown to potential partners.
These are legitimate concerns. It is not unheard of for ideas and concepts to be stolen. However, you have to be careful how you approach potential partners. Think of it as dating, you do not ask your date to sign a contract on the first date; you go to dinner and a movie; you follow up and then you start asking about the confidential stuff.

The venture capital paradigm where an investor is seeking venture capital money provides a good model for how the interaction between a potential business partner and an entrepreneur works. In our experience, the majority of professional investors refuse to sign NDAs. As set out in The Startup Lawyer, “if VCS maintained the practice of signing NDAs for each submission they received, only two groups would benefit: lawyers and paper companies. Lawyers would benefit because they would get to draft, edit, and negotiate each NDA. Additionally, the VCs would have to retain a team of lawyers to keep track of all the NDAs they’ve signed with the fund-seeking entrepreneurs that have come before you. Therefore, NDAs would increase a VC’s transaction costs and potentially prevent a VC from even hearing your pitch. Both reduce the already slim chances you will get funding.”

VCs get many, many ideas put in front of them, and it would not be practical for them to sign a NDA every time they reviewed an idea. Just keeping up with the paper trail would be a logistical nightmare. Additionally, confidentiality is part of the VC’s business model. Keeping such information confidential is crucial for them to attract entrepreneurs.

Beyond this concern, however, I believe companies should really focus on what they are putting in their business plans and how they go about interacting in the initial stage with potential partners. If we go back to the first Intellectual Property Tip, remember — “Keep your Secrets, Secret.” You should be able to provide a potential partner fairly complete information that gives both parties a sense of whether you want to go forward; remember the dating analogy — get to know one another first and then decide whether you want to take a relationship to the next level.

I am a strong believer that in most situations a glossy flyer with non-confidential information, coupled with a website or promotion material with general numbers that can probably be gleaned from the public record is a good starting point. Get a package together that does not require a NDA.

A trickier situation occurs when the only advantage a company may have is a trade secret. Nonetheless, I think entrepreneurs need to figure out ways around this*; if the only thing that protects your business is a piece of paper, you have to wonder generally about the viability of the business. In order to sell a product or service, you are going to have to tell people about the product or service without getting a confidentiality agreement.

I believe healthy skepticism is good, but paranoia about theft of a business idea is counterproductive. Your idea is only as good as you make it; get over yourself and get to work building a business.

Finally, parties executing ideas or plans need to be concerned with non-standard terms. In addition to confidentiality provisions, from time to time, you will find non-solicitation clauses, and sometimes non-competition provisions. Generally, I believe that these are overreaching provisions that do not belong in NDAs absent unique circumstances, which rarely exist. A good summary about the standard provisions can be found at this blog.

Non-disclosure agreements should be standard. Do your part to keep them that way. If you are talking too much with a lawyer about signing or creating a NDA, ask yourself if you’re appropriately protecting yourself or are foolishly paranoid.

Mike Goodrich
Goodrich Law Firm, LLC

* If you do not have something that is patentable, then you are going to have to contend with people knowing about your product or service and being able to replicate it at some point in your business life.

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