The Fuss about Non-Disclosure-Agreements(NDA)

By: Bernard Leong
Submitted: 2007-01-17 15:35:56
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Suppose you have a technology company and a technology (which may be a trade secret or in the stage of patenting), you need to meet an investor (whether it’s a venture capitalist or business angel). How do you protect yourself from the investor stealing the idea? A partial solution is the use of a legal document called the Non Disclosure Agreement (NDA). What does this agreement entails? Notice that I use the word partial, because not all investors like NDAs. I will discuss the possible situations where it may be or may not be appropriate to use it and provide a template for those in Singapore who might need it.

In short, A non-disclosure agreement (NDA), is a legal contract between at least two parties which outlines confidential materials or knowledge the parties wish to share with one another for certain purposes, but wish to restrict from generalized use (Source: Wikipedia). In short, it is just a piece of paper to ensure that two parties have agreed not to reveal any information covered by an agreement. If you are selling a particular product that requires protection to deal with the risk of replication by other competitors, this agreement is an essential piece of paper for you. Other terms of the same nature include a confidential disclosure agreement (CDA), confidentiality agreement or secrecy agreement.

In the case of the startups, NDAs are signed when two companies or individuals are considering the creation of a business enterprise, an investment proposal or a partnership agreement. It is required for evaluation of a business relationship as well. NDAs can also mean the following situation: either that both parties are restricted in their use of the materials provided, or they can only restrict a single party. In the case of large companies or even universities and research institutes, NDAs are required to protect privileged information that are disclosed to the employees.

Here are a couple of questions which I often encounter when an entrepreneur asks about the NDA:

Where can I find a template of an NDA that details such an agreement?: Basically, the entrepreneur needs to find an example on how to draft an NDA. You can find this URL from Enterprise One where sample NDA templates are provided. Note that it is a sample and you need to modify it to suit your purpose.

I hear from my lecturer or from some VCs that they don’t accept NDAs: From the investors’ viewpoint particularly, the venture capitalists, there are two schools of thoughts. Some VCs are alright with signing one and some of them are not. There is no hard and fast rule. So, why is it that some venture capitalists or business angels don’t like to sign an NDA? There are two reasons: first, they don’t want to be tied down because they might encounter an alternate party sharing similar technology or idea like yours and second, the arrogance that since they are receiving a hundred plans per day, what makes your plan that unique that they should sign one?Let me give you my personal experience. In the UK and Europe in general, NDAs are common, and whether you are a startup or an established company, when you need to divulge something regarding technology, a NDA is required. You can imagine my shock when I hear some local investors (but they are trained in the US) telling me that they don’t need that. So, NDA signings can be cultural in another perspective but it is an universally acceptable practice to request the other party to sign an NDA if you feel uncomfortable. You don’t lose brownie points if you ask and they reject signing it. When I do consulting or fundraising for a biotech company who needs to divulge their technology so that I can do a valuation of how much they are worth, I usually ask for a NDA so that my client will trust me to look at their company.

Why do I need a NDA?: The answer is obvious. You need to protect your company. Actually, if you listen long enough to successful entrepreneurs, the real strategy is never to protect your technology, but rather, protect your markets, i.e. create barriers of entry for your competitors so that they need a lot of time and effort to roll out an alternative product to match yours.

In practice, it’s good to have one sample NDA with you when you go out and pitch your product. Usually, some people place a few NDA papers in their brief case, so that it comes in handy when meeting investors, business partners and even clients.

Article source: Expert Articles