Keeping Secrets: Use right-sized NDAs to guard your secrets well while doing business right
I’m not saying any names, but I’ve seen both of the following really happen:
An inventor met the perfect investor, but things went nowhere when that investor refused to sign a standard non-disclosure agreement (NDA) that was needed to keep the inventor’s patent rights valid. Second story: A client hired some consultants to improve her business operations, only to find out that all along they were stealing her secrets so they could start a competing company. Her standard NDA wasn’t strong enough to hold them back. She ended up having to spend a bunch of money and sue them. We won—but not because of the NDA.
In both cases, the NDAs were good and typical agreements, but they were not what I call “right-sized.” The problem is that most people just throw a standard NDA at all situations because they see an NDA as a checklist item: signed or not signed. They aren’t confident that they can understand the complicated legal details. But you don’t need to be a lawyer to recognize the issues.
Ask yourself three questions: Why do you need confidentiality? How much trust is appropriate? How will you be sharing your secrets? For each answer, the more issues you have mean a more complex NDA, while less mean a simpler NDA. For very simple situations, your NDA could be a single sentence that even a shy investor could agree to.
You typically need confidentiality for one or more of the following reasons:
- You need to keep your patent rights preserved
- You’ve promised someone else to keep the secret
- Someone may steal your idea, and/or
- Something else bad would happen if the secrets were shared (e.g. you lose a competitive advantage, bad PR)
List out why you need confidentiality and make sure your agreement covers those bases. Avoid covering more than those bases. Sometimes that means adding a non-compete clause to the agreement or requiring that they follow particular procedures if something happens.
Understand the level of trust between the people sharing secrets and those receiving the secrets. This means you need to look hard at the relationship in the light of what is being shared. Ask yourself, if that trust were to be broken, would the worst consequences be to the relationship or would they be the problems for your business? Also, think about what factors lead to high/low trust: e.g. past behavior, interests that are aligned or not, consequences that are shared or not, and their ability to compete with you.
Come to a gut feeling about the trust. Is it high, medium or low? If it is low, reconsider sharing your secrets at all. If it is medium, treat the agreement like a typical commercial relationship. If it is high, you can usually simplify the language. Pro tip: don’t just assume that the trust is high because the other person is a relative.
Are you protecting a one-time disclosure of secrets? Will there be a short period of disclosure, or will it be more like a prolonged relationship (e.g. employment) where secrets are shared regularly? Again, the more disclosure, the more that needs to be in the agreement.
If it is a one-time disclosure, be sure to specifically mention that in the agreement. If there will be a short period, mention it and describe how the period begins and how it ends. If there will be a prolonged relationship, then the non-disclosure terms should probably be a sub-part of a bigger agreement outlining that relationship. Also, the more/longer you are disclosing, the more detail you have to put in about how they receive your secrets, what they should do with them while they have them, and what they need to do at the end of the disclosure or relationship.
Now you understand the issues. The next step is to give yourself a small library of right-sized NDAs that are all OK but have titles that explain what they are right for, or in what situations you might use them. If you have a small menu of NDA agreements on hand, you can make better choices about what to email over to the other side; you are more likely to have them sign it, and are more likely for it to protect you the way you need.
Most entrepreneurs need at least three. These three will probably include:
- A very simple “keep my IP rights valid when sharing with a trusted person” agreement
- A “medium-trust single event or short period disclosure for use with possible strategic alliances,” and
- A “partner/employee confidentiality clause for use in a bigger agreement”
- Even if you don’t build yourself a library, be sure to mention the issues above with your attorney and they can use that to build a right-sized agreement for you.
Jason Webb is a registered patent attorney with JP Webb, a firm specializing in IP law.