When should you use a non-disclosure agreement?

Alidad Vakili / January, 2018

Description

Alidad Vakili, Associate at K&L Gates explains when and why you should use a non-disclosure agreement.

Video transcript:

When should you use a non-disclosure agreement?

A non-disclosure agreement is essentially a confidentiality agreement. It’s an agreement that will restrict anyone receiving confidential information from using that except as otherwise provided in the agreement. It’s often times agreement we see very frequently with startups and it comes a number of different scenarios, I will touch on it in a few moments and as far, you know, when you might be expecting using it, pretty early on.

What would be the benefit of using it and why should you use it? Anytime the company or the founders are going to be disclosing anything that is proprietary or confidential, they want to be thinking about should they have a confidentiality agreement in place before they actually disclose the information.

Examples might include: you have three founders that have come up with a great new technology and they’re interested in starting a company and exploiting that technology, but they need to bring in a fourth person because the fourth person might be the technical person they need to get it going. Well, before disclosing their technology with this fourth person that could be added to the founders’ team, they really should think about having a non-disclosure agreement. Because once you have that discussion and you have disclosed the technology, if you don’t have anything protecting it from that person from then taking it and using it, you potentially jeopardized your startup from the very beginning. That’s certainly one instance of when you might want to have a non-disclosure agreement.

Others instances include and often times we’ll see them used in scenarios where the company is going to raise funds or there’s going to be a potential sale of the business or sale of some technology in the business. Even with vendors, we’ve seen them where the company has a really unique technology that they want to try to sell to a vendor or to provide to a vendor that then goes to service other companies. So that relationship would be one where you want to protect the information that you will be disclosing. So the first thought would be if you’re disclosing anything that has a lot of value and that is not known to the public and that you want to protect, that’s when you should be thinking about a non-disclosure agreement.

Should you have a non-disclosure agreement with investors? It really depends on the investor; a number of investors won’t sign a non-disclosure agreement. Because if you can imagine, they’re meeting with prospective investees or companies they might invest in on a regular sometimes daily basis, and if they had to manage the number of non-disclosure agreements that they signed, it would pretty soon balloon into a very cumbersome management process for them. So, some just by policy refuse to sign any nondisclosure agreement. So, you have to be careful, you should vet your investors just as they vet the startups. If they’ve got a good a reputation in the community and they’ve been known to invest in other ventures and you can get references and then certainly, we’ve seen a lot of companies that would not have a non-disclosure place before they talk to a potential investor.

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