THE NEED FOR NONDISCLOSURE AGREEMENTS

Yesterday, an article appeared in the New York Times which discussed the declining use of Non-Disclosure Agreements ("NDAs") among startup companies.  The article centered on two main points:

• idea sharing has become prevalent between startup founders, for better or worse
• Venture capital firms ("VCs") are refusing to sign NDAs when investing in companies

The second point is particularly troubling for business owners. If the startup needs funding from VCs who refuse to sign an NDA, whats to stop them from sharing one business' idea or concept with another company they invest in? Simply put, nothing.

I was speaking with the founder of a startup last night who shared with me his uneasiness about VCs refusing to sign NDAs. He echoed a sentiment that I'm sure many other start-up owners feel "What can we do? We need the money." The unfortunate reality is that VCs refusing to sign NDAs only benefits the VCs. However, that does not mean that businesses should not request that an NDA be entered into with anyone that will be privy to proprietary information/materials. 

So what does a non-disclosure agreement do? An NDA protects confidential information, materials or knowledge that is to be shared with another business or person (including employees.) The agreement establishes not only how the receiving party may use the confidential information, but also the remedies should a breach of the agreement occur. Of course the disclosing party is entitled to damages for a breach of the agreement, but the agreement can spell out how the damages are to be calculated or whether injunctive relief is appropriate. 

NDAs also help establish the protection of a business' confidential information, which is a necessary element to any litigation challenging whether or not the confidential information qualifies as a trade secret. Simply put, a business must take steps to protect its proprietary information to qualify as a trade secret, and routinely entering into NDAs helps establish that. Even if a VC doesn't sign an NDA, it is in a business' best interests that they require other parties to enter into NDAs to help ensure trade secret protection. 

In my discussion with the founder last night, he asked me "Even if the VC doesn't sign an NDA, aren't my ideas protected some other way, like by copyright?" The short answer to that question was no. Although this was already the subject of a blog post, copyright protects the expression of an idea, not an idea itself. 

Upon learning that without an NDA, his business has no control over the proprietary information shared with a third party, the founder was rightly uncomfortable, but repeated "What can we do? We need the money." I told him what I would tell any business owner, that an NDA should at least be offered. Some VCs may sign it, some may not, but the few that do will at least give some piece of mind that the business' proprietary information is protected. 

Although a business may make the decision that VC funding without an NDA is acceptable, NDAs should still be extended to all others with whom proprietary information is shared. No matter who a business is sharing proprietary information with, an NDA should be proposed.