To NDA, or Not to NDA?

Chances are, you started your businesses because you had a ‘special sauce:’ something that makes you better than anyone else out there. For better or worse, eventually, you’re going to have to tell people those secrets, whether they’re recipes or strategies. That creates a legal issue: how do you make sure people don’t steal your secrets and start competing directly against you? Luckily, lawyers came up with the perfect solution: a Non-Disclosure Agreement, also known as an NDA.

In a nutshell, an NDA is a legal agreement dictating that confidential information must stay confidential. There are many different types and clauses with specific purposes, but we’re not the experts. If you’d like to get deeper into the weeds, Kaufman Fasttrac does a great basic overview of the topic. Here, we’re going to talk about whether or not they’re necessary.

When to NDA

  • Co-Founders. We hate to be the bearer of bad news, but unfortunately, it’s normal for co-founders to have occasional relationship drama. This doesn’t necessarily mean anyone will leave the company, but if it does come to that, an NDA could make sure that your co-founder doesn’t immediately turn around an become a competitor. This is especially important when you take on outside investments. A sophisticated investor will require founders to agree that the intellectual property is required to stay with the company, even if one chooses to leave.
  • Employees, Contractors or Freelancers. When you hire, you’re most likely going to have to share the secrets about your business in order for your team to replicate what you’ve created. Since that employee is already working in the industry, they feasibly could quit and replicate your exact recipe to be your competitor. (There’s a reason why the dog in the Bush’s Baked Beans commercial is so closely monitored.) An NDA could give you the ability to pursue legal action if an employee does steal your intellectual property. For more reasons, check out EverydayNDA’s 4 Reasons to sign an NDA with Employees.
  • A Million More Reasons. There are countless situations in which an NDA is beneficial. There’s no way we can think of all of them, but the Corporate Counsel Business Journal does a great job summarizing the main points.

When not to NDA

  • Investors (during the first pitch). Be careful when asking a potential investor to sign an NDA, especially if it is during your first meeting with that investor. If you are working with active angels, VCs or other funds, there is a chance that asking them to sign an NDA will kill the deal before it even starts. You are essentially creating a legal liability for the investors before they have even really contemplated investing! Entrepreneur goes into more detail and gives some good suggestions on how to remain protected.
  • Lawyers. This one is more of a technicality, but useful to know. Your lawyer does not need to sign an NDA, because you are already protected under attorney-client privilege. This is also true for many other professional services, so before requiring everyone and their mother to sign one, see if you are already covered.

We do want to stress that before you make a final decision about whether or not an NDA is necessary, it’s always smart to reach out to a lawyer. They can talk about the risk in your specific situation, and give you more details to help you make the right choice.

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