June 7, 2020

There Is No Such Thing as a 'Standard NDA'

Nolo defines a nondisclosure agreement (also known as a NDA or confidentiality agreement) as a legally binding contract "in which a person or business promises to treat specific information as a trade secret and not disclose it to others without proper authorization. Nondisclosure agreements are often used when a business discloses a trade secret to another person or business for such purposes as development, marketing, evaluation, or securing financial backing. A nondisclosure agreement will not protect trade secrets if the trade secret owner has not taken reasonable steps to keep the information secret." While NDAs are often signed during the normal course of conducting business transactions, they should not be entered into lightly.

This blog post has been sitting in my "draft" folder for several months. The idea for the post came when I attended a Meetup event that was being hosted in the office of a Fortune 500 corporation. To my surprise, the company required attendees to sign a one-page NDA. When I expressed that I take any document that legally binds me, individually, or my company seriously and I had concerns about NDA that was presented for my signature, I was told "it's just a standard NDA." (I also inquired into why host a public event if doing so creates a risk of attendees stealing trade secrets despite our movement being limited to the cafeteria. I did not receive a response.)

"There is no such thing as a 'standard NDA' when it legally binds you, individually, or your company," an attorney said to me when I started my professional career 27 years ago. While many NDAs are poorly drafted and those that are well-constructed are often difficult to enforce, they should still be taken seriously.

If you are an entrepreneur making a pitch for money from a prospective investor, do not ask the investor to sign a NDA (see slide 37 in "Fundraising for Your Business: Dos and Don'ts of Pitching to Your Investor"). Asking the investor to sign a NDA conveys a message that you want the investor to trust you with his or her money, but you do not trust them with your idea. And while you may think your idea is the next unicorn (a business whose valuation is more than $1 billion), business success is based on execution and not ideas alone.

Here are a couple of articles that provide additional information about investors not signing a NDA: "Why Most VC's Don't Sign NDAs" and "Why Investors Don't Sign NDAs."

As a prospective investor, I do not sign a NDA until my advisors and I commence the due diligence process. Prior to this step, we will have held several meetings with the founders and thoroughly reviewed company's business and financial plans.

I will, however, sign a NDA as a recipient of confidential information on behalf of my company early in the process when I am seeking to enter a partnership with another business, establish a joint licensing agreement or commence a merger and acquisition. It is important to note that that I am signing the NDA as an officer of my company and not me as an individual. The distinction is important in order to protect the corporate veil the creates a separate, legally recognized corporate entity and shields me as the shareholder from personal liability.

As previously mentioned, I have seen many poorly drafted NDAs. Common errors include not properly defining the recipient or discloser, an incomplete definition of confidential information, and term of the agreement. The NDA that I use, which was prepared by my attorney, may be found below or downloaded through this link.

My attorney also provided the following instructions that all parties should follow when executing the NDA:
  • In blue ink, write you initials on the lower right-hand corner of each page except for the signature (final) page. Applying initials to each page will prevent one party for switching a page containing language different from the original agreement; and
  • In blue ink, sign, print your name and date on the signature page. The purpose of the blue ink is to signify that the signature is an original one. This is important should there ever be a dispute as to whether or not a party actually signed the NDA.
In lieu of physically signing the NDA, it is now generally acceptable to execute the agreement via a web-based electronic signature service.

What are your thoughts on the purpose and timing to sign a NDA?

UPDATE: Upon reading this post, a friend forwarded a link to "How to Use and Review Non-Disclosure Agreements (NDAs)," which contains additional information about NDAs.

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

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