How to Decide if You Need a NDA

By Kresimir Peharda, Partner

Whether you are a start-up or a public company and are dealing with a third party you are often faced with the question of: do we need a non-disclosure agreement (NDA).  Most of the time the answer is yes.  However, some of the time a NDA may not give you the protection that you are expecting.

What is a NDA?

A NDA is an agreement, usually between two parties, that requires the recipient of confidential information to keep that information private for some period of time.  Sometimes only the recipient agrees to keep information confidential.  In other instances, both sides agree to keep the information they receive from the other side confidential because they are both recipients.

Is it important?

If the information you are providing to a customer, contractor, business partner, or interested party is an important aspect of your business, then you probably need a NDA.  Examples of this might include:

  • Source code
  • Customer lists
  • Product specific know-how
  • Ingredient lists
  • Future business plans
  • Current financial status
  • Profitability per product or service
  • Supplier names
  • Terms with key suppliers
  • Terms with key customers
  • R&D unpublished

 

One way to tell if it is important is to ask if the information is generally disclosed to the public.  If it is then it is not eligible for NDA protection.  The more effort you expend in keeping certain information confidential the more likely it should only be disclosed pursuant to a NDA.

What are the consequences of this information becoming public?

If the recipient of your information revealed it to another party who is not party to the NDA, what would happen?  What type of harm could ensue?  Could a competitor use this information to its advantage?

Who will not sign a NDA?

Venture capitalists and some private equity firms will not sign NDAs as a matter of practice.

How much protection does an NDA offer?

Depending on the text of the NDA, the innocent party will typically be entitled to get a court order to block the disclosure of the information and monetary damages resulting from the disclosure.  Even these two remedies may not be sufficient if the offending party is a very large company.  Some very large companies may have a strategy of seeking out small companies with relevant technology and “borrowing” this information without paying.  They do this knowing that the millions of dollars they have available for litigation are a hammer that they can use against small poorly funded companies.  The bottom line is an NDA offers a good deal of protection for relatively equally matched parties.  A NDA cannot, however, erase the advantages that an enormous war chest confers.