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Archive for the ‘NDA’ Category

A Guide to NDAs for Startups and Entrepreneurs

Nobody wants to sign your NDA. VCs, software engineers, freelancers — will all likely throw some shade your way when you bring up “non-disclosure agreement.” But if you’re an entrepreneur, you still need to protect your confidential information in certain circumstances.

In this post, we will cover why you need an NDA, who you should expect to use one with, what should be in it, how to draft the document, the proper timing for signature requests, and how to enforce a non-disclosure agreement.

Here we go.

What is an NDA?

NDA Signature

An NDA is a legal document that is intended to set up a confidential relationship between two or more parties, made up of a party disclosing information and a party receiving information. The non-disclosure agreement stipulates that information shared between parties should be used only for the purpose of that specific partnership, so as to protect the market position and the competitive advantage of the disclosing party.

Basically, the two parties agree to share information in order to help each other — while promising not to use that information outside of the relationship in such a way that could damage the other party’s interests.

NDAs can be written as a section of an employment contract or separately drawn up. A non-disclosure agreement can also be referred to as: Confidentiality Agreement, a Confidential Disclosure Agreement, a Proprietary Information Agreement, a Secrecy Agreement, a Proprietary Information and Inventions Agreement, or for that matter, any other arrangement of words indicating confidentiality that a disclosing party might prefer.

Why Do You Need an NDA?

If you are building a business, presumably there is certain information you wouldn’t want getting into the hands of potential competitors. Here are some of the main assets businesses seek to protect through an NDA.

Intellectual Property

Because of the incremental but speedy nature of software development, Intellectual Property Rights (IPR) patents are quickly becoming irrelevant in the industry. Most developers working on new projects are free to use code from open source libraries like ReactJS or AngularJS, which means the wheel is hardly ever reinvented for new software.

In most cases, it would be counterproductive to file a patent for code that would be outdated by the time said patent was delivered. Instead, companies can protect their software innovation by including a work-for-hire clause that requires that the rights to the code and products developed by employees and freelancers are automatically transferred to the company.

This can be included as a clause within the NDA, or for those who are really concerned their pot of gold will be pilfered, a separate Intellectual Property Rights Agreement like this one can be used. However, this may feel excessive to some and can be taken as an insult to one’s professional integrity. In fact, legal experts suggest that common law will usually be enough to uphold an employer’s rights to all of the creative works developed by employees in their service. However, this is not true of independent contractors, who will retain rights to their work unless otherwise agreed upon. Therefore, entrepreneurs should take care to include a work-for-hire or transfer of rights clause in an NDA or contract when working with freelancers.

Proprietary Information and Trade Secrets

There is a slight distinction between proprietary information and trade secrets, and a business may reasonably want to protect both. Proprietary information is any unique information that a business uses to operate, including:

  • Suppliers
  • Manufacturing agreements
  • Marketing strategy
  • Development processes
  • Pricing
  • Customer lists/client info
  • Research & data
  • Formulas and algorithms
  • Unique code
  • Test results
  • Product development plans

The list goes on. Not all proprietary information is, or needs to be, confidential. The business must decide what proprietary information they want to mark as confidential, thereby making it a trade secret. The Uniform Trade Secrets Act defines a trade secret as:

(i) information that derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

Basically, this is your “secret sauce.” Information that helps you make a profit and is not readily available to others — the stuff that you wouldn’t want your competitors to have.

The most important reason for using an NDA is to guard against future legal expenses. You can hopefully avoid future litigation by protecting your trade secrets and insisting on ownership of the intellectual property developed at your business.

The NDA should be designed to provide a measure of protection against having to sue someone who has improperly used your information and, likewise, avert the risk of being sued for rights or royalties by a former employee or freelancer who wants to claim rights to products they helped develop.

What’s in an NDA?

This section will go over the eight clauses of an NDA, two of which are optional and should be carefully considered if written in.

Definition and Scope
Representative Provision
Return Clause
Arbitration Clause
Attorney Provision Fee

Sample NDA

1. Definition and Scope

The definition and scope of what will be considered confidential are the most important parts of the NDA. It’s best to be specific when designating what proprietary information will be a trade secret. Without further clarification, terms like “proprietary information” or “business practices” are vague, and will likely not be enforceable if put to a legal test. Plus, under such broad terms, all information exchanged could be considered confidential. In a one-way NDA, the receiving party would be wise to walk away.

Whether it be your codebase, algorithms, client lists, product roadmap, or any other valuable proprietary information, it should be specified as confidential in the NDA. Future communications or documentation including these confidential items should also be marked as such with a “confidential footer.”

2. Non-use

As we’ve mentioned in an earlier section of this article, the whole purpose of an NDA is to formally agree that the information exchanged is only to be used for the parties entering into partnership. Therefore, your NDA will need to have a non-use clause. In addition to agreeing not to disclose your confidential information, the non-use clause also prohibits the receiving party from making use of the information in such a way that would be damaging to the vital business interests of the disclosing party.

The non-use clause is intended to prevent:

  • Formation of new businesses in direct competition to the disclosing party
  • Receiving parties from using confidential proprietary information as a bargaining chip for personal gain or new job opportunities
  • Existing competitors from soliciting current employees or freelancers for the knowledge they have of your business secrets

The non-use clause should not prevent:

  • The receiving party from using new skills learned in the future
  • The receiving party from working on projects with similar but technically different applications in the future

? To make the non-use clause more acceptable to the receiving party, consider making the restriction only as long as the duration of the project or employment contract

3. Non-compete

The jury is out on whether or not it’s appropriate to use a non-compete clause in your NDA. Any developer worth their salt is probably not going to sign anything that restricts their future employment options.

Freelancers will be especially sensitive to any non-compete language. If you must have a non-compete clause, it should only be designed to prevent the employee or freelance developer from taking your technology and business model to a direct competitor or soliciting your employees to start a competing business venture. It typically should notprevent them from working in the same industry or location, for any period of time.

In truth, both of these objectives can be achieved with the non-use clause. Another reason to tread lightly when it comes to non-compete is that many state courts deem non-compete restrictions a barrier to free trade and seldom enforce this part of an NDA anyway.

4. Representative Provision

To provide your partners with more flexibility and freedom to complete the project as they see fit, you should consider including a representative provision. The representative provision permits confidential information to be shared with associates of the receiving party for the purpose of completing the project. Once information is shared with a representative, he or she will be bound by terms of the NDA as well.

This clause should define who may be considered a “representative,” and can also require that the recipient party inform the disclosing party of any additional associates who will be collaborating on the project.

5. Duration

When drawing up an NDA, you will want to define a reasonable length of time for the agreement to remain in force. Too short, and you expose yourself to the risk of competitors learning your trade secrets before you’re able to establish a firm competitive edge. Too long, and skilled developers will not want to work with you. Most experts suggest anywhere from two to five years as a fair term of obligation, after which the agreement will automatically terminate.

6. Return Clause

Throughout the course of a project, you will have likely transferred a lot of files, instructions, data, communications, and other materials containing your business’s confidential information. Upon termination or completion of the project, you will want the return or destruction of the most sensitive of those documents. This clause stipulates that upon the written request of the disclosing party, the recipient of confidential information returns or destroys the material in their possession.

Just like confidential information should be specifically defined, what must be returned or destroyed should also be specified. Unless you are a government defense contractor, it won’t be necessary to ask someone to delete every single email or file they have received from you — just protect the key ingredients of your secret sauce!

7. Arbitration Clause

Should things go awry, having a mutual understanding of how to handle a dispute can save you money and hassle. Lawyering-up and going to court to file a lawsuit is very, very expensive. This should be considered a last resort. the arbitration clause is the place to outline alternatives to official litigation.

Your preferred path should be good faith mediation between parties. This is essentially a discussion facilitated by a moderator to air grievances and explore solutions. If informal mediation fails to resolve differences, you can opt for a binding (or non-binding) arbitration committee. This like a mini-trial outside of the official judicial system. Arbitration committees can deliver decisions, which are typically a good indicator of how an actual court proceeding would go. Your last and most resource draining option is to bring your dispute to trial.

Lastly, your arbitration clause should identify the territory whose laws will be used to govern the agreement, including any disputes.

8. Attorney Provision Fee

An attorney provision fee requires that the “losing” party of a lawsuit pay the legal fees of the prevailing party. Of course, this will help to ease the burden of litigation, but it also conflicts with mediation and arbitration for that reason. When passions are inflamed and both sides believe they are in the right, removing the threat of financial punishment will mean that parties are less likely to cooperate. With that in mind, you may choose to include or not include an attorney provision fee in your NDA.


What’s Not in an NDA?

What's not in an NDA?

Public knowledge. As mentioned earlier in this article, most software applications today are developed using snippets of open source code. If the codebase used to develop your project is publically available, it cannot be included as part of your confidential information. That being said, new changes made to source code may become part of your business advantage, and can be protected under the NDA.

Prior knowledge and independently developed knowledge. Rights to knowledge or innovations credited to the freelancer prior to the partnership will be retained by the freelancer developer. The same goes for knowledge developed independently of the project, even if it occurred during the time of the partnership. Freelancers would be wise make an itemized list of any valuable knowledge or previous inventions to be covered under this clause.

Third Party Information. Freelance software developers often work with various clients, and they may have more than one non-disclosure agreement in force concurrently. The NDA should specifically note that information obtained by a third party is not confidential. This protects the freelancer from being unfairly sued for breach of contract in the case that information disclosed from various parties overlaps.


Now you know what is and isn’t in an NDA, who should you get to sign your NDA and when? Should you ask for signatures from freelancers or VCs? When should you lawyer up and how does one enforce an NDA? Make sure to read the Guide to NDAs for Startups and Entrepreneurs for answers.