I get asked about NDAs all the time. That makes sense: entrepreneurs are idea-driven and instinctively understand the value of intellectual property protection (see my quick and dirty summary of intellectual property protection). But are NDAs really necessary in all contexts? Read on for when you should and shouldn't consider using an NDA to keep your ideas safe.
5 Essential Facts About NDAs
Enforcement can be expensive, and an NDA is only worth as much as the underlying secret. NDAs cannot physically prevent disclosure. They simply impose a contractual obligation and provide legal remedies for breach, such as disclosure of a trade secret. Someone could decide to breach an NDA for lots of reasons. If the cost of a lawsuit is greater than the value of the confidential information, it won't make economic make sense to sue. In that situation, an NDA is basically worthless.
If your idea is so easy to steal, it's probably not worth much. How can you know if your idea is valuable enough to need NDA kind of protection? To paraphrase something David Teten of FFVC said at a recent talk, if an idea can be stolen just by you speaking about it for 20 minutes, then it's probably not worth pursuing. If the barriers to entry are so low, or your ability to execute is so weak or non-differentiating that someone could steal your business plan, pull it off, and squeeze you out, then it's probably not such a great idea to begin with.
NDA's should not be used to hide shenanigans. Some of you tricksters out there might think it could work, but if you want someone to sign an NDA to try to hide illegal behavior, forget about it. Whistleblower protection such as Sarbanes-Oxley will void an NDA, and criminal prosecution is a significant risk.
Ok, so when should you ask for an NDA? One good use case is to protect a new invention that you are planning to patent—if the invention gets publicity before you file, you could lose the right to a patent. Another example would be if the confidential information is more than a mere conversation, and includes technical documentation or other information that would enable another party to replicate some aspect of your product that they otherwise could not. A third case would be to include an NDA clause in an agreement which is itself highly sensitive (along with appropriate IP, indemnification and other protective provisions).
To summarize, an NDA is best used when you are sharing i) valuable information, ii) that is valuable primarily because it is not widely known, and iii) disclosure of which would significantly damage your business plan and prospects.
In situations where an NDA isn't needed, it may even be harmful. Presenting an NDA can seem aggressive. It can also seem foolish or out of touch if the other party doubts there is sufficient value in the confidential information to warrant an NDA. Finally, if someone refuses to sign an NDA, you could be in a jam. If you decide to talk to them anyways, you may lose standing in their eyes—and bargaining power.
A standalone NDA is typically warranted only in respect of sensitive and economically valuable information. If you're not in that scenario, an NDA is at best wasteful, and at worst could seriously damage your negotiating position.
Disclaimer: This is not meant to be legal advice and you should speak to an attorney if you have legal questions. Please don't make any major decisions based on an article you read on the internet.