Non-disclosure agreements (NDAs) allow founders to share confidential information with potential customers, partners and investors. To protect this private information and their business, founders should understand and implement the key aspects of an NDA.

Essentials of a non-disclosure agreement

An NDA is a contract between two or more parties that deals with the exchange and handling of sensitive, non-public information.

  • Use an NDA before disclosing or receiving any sensitive information that might be compromised by public disclosure. Information that relates to competitive advantages, potential business opportunities and intellectual property for which you may intend to file a patent application would fall under this category.
  • The terms of the obligations in your NDA will never expire. If you must fix a term to the agreement, usually a term of five years will not raise any due diligence concerns for potential investors and buyers of your company.
  • NDAs protect your patent rights. if you have an invention for which you wish to file a patent application, a non-confidential disclosure of that invention can potentially compromise your ability to obtain patent protection. NOTE: While some countries, such as Canada and the United States, provide a limited ability to obtain patents after a public disclosure, most countries treat a public disclosure as an absolute barrier to patentability.
  • NDAs are usually simple documents no more than two or three pages in length. Their key provisions include:
    • a description of the confidential information to be disclosed
    • the purpose for the disclosure
    • the permitted uses of the disclosed information
    • the standard of care for protecting the other party’s disclosed information

Sample NDA forms can be found online. Usually, after some experience, startups are able to negotiate the agreements without too much assistance from their legal counsel.

NDAs and Potential investors

Founders should always ask potential investors to sign an NDA. Some will sign, and some won’t. If investors decline, it at least gives founders an opportunity to demonstrate that they are easy to work with by not raising too much of a fuss.

It is uncommon for institutional venture capitalists to steal trade secrets in a manner that might harm a startup, and you can often manage the patent disclosure risks with the right input from your legal counsel. For angel and one-off investors with experience in your industry, the reputational disciplines are likely the same, but you may want to press a little harder to get the comfort you need in order to move forward.

This article was produced by James Smith and Shane MacLean and is made available through the generosity of Labarge Weinstein Professional Corporation.