Do I need non-disclosure agreements (NDAs)?

Takeaway: It depends on how proprietary your intellectual property is and who you’re talking to. Investors generally will not sign NDAs. If you’re negotiating a commercial deal with a partner you worry might build the tech themselves, it’s probably a good idea to have an NDA in place. Keep an eye out for residuals provisions that could be a backdoor workaround for your counterparty.

Non-disclosure agreements (NDAs) are legal contracts that prohibit companies and individuals from disclosing confidential information. For startups, NDAs can be a valuable tool to protect their intellectual property and confidential information. However, in general, startups use NDAs less than people think primarily because, with some exceptions, startup success or failure more often hinges on successful execution of the idea rather than the idea or technology itself. Whether and when startups should use NDAs depends on a variety of factors. Here's a look at some things to consider.

Nature of the information

Startups should consider the nature of the information they want to protect with an NDA. If the information is highly confidential or proprietary, such as trade secrets or product designs, an NDA may be necessary to protect it. Examples of this include materials or processes that your company intends to patent.

Stage of the company

The stage of the startup can also impact whether or not to use NDAs. Early-stage startups may need to share more information with investors, advisors, and potential partners in order to grow and scale. In this case, NDAs may be less necessary. Later-stage startups with established products and customer bases may have more sensitive information to protect and may require NDAs.

Relationships

Startups should also consider the relationships they have with the individuals they want to share information with. NDAs may be appropriate when sharing information with potential certain investors, advisors, or partners. However, NDAs may not be necessary when sharing information with employees or contractors who have signed employment or contractor agreements that include confidentiality provisions. In general, many venture capital investors will not sign NDAs not because they intend to use the information they learn but because they look at so many companies it is logistically impractical for them to keep track of and comply with so many NDAs.

Enforceability

It's important to note that NDAs are only enforceable if they are properly drafted and executed. Startups should work with qualified legal professionals to ensure that their NDAs are legally binding and enforceable.

Keep in mind that NDAs are only as good as your ability to enforce them. If you sign an NDA with Google and Google breaches the NDA, you still have to sue Google to enforce the NDA. Google has lots of lawyers that can make this expensive and difficult.

Conclusion

Startups should carefully consider whether and when to use NDAs to protect their confidential information. By weighing the nature of the information, stage of the company, relationships, and enforceability, startups can make informed decisions about when NDAs are necessary to protect their intellectual property and confidential information.

If you do sign an NDA, one term to watch out for in NDAs is called a “residuals” provision, which generally permits the recipient to retain, use and disclose information that they have not written down but can recall with their unaided memory. In practice, it is very difficult to monitor what was written down and what was recalled with an unaided memory. From the company’s perspective, there is typically no compelling reason to include a residuals provision in an NDA.