Should I Be Using a Non-Disclosure Agreement?
So you have this billion dollar idea and you are trying to determine if it is something worth pursuing. The first step in answering this question is validating your idea. You validate the idea by sharing it with others and getting their feedback. "What if they steal my idea?", you may ask... Meet the Non-Disclosure Agreement (also referred to as an NDA).
noun: non-disclosure agreement
a contract by which one or more parties agree not to disclose confidential information that they have shared with each other as a necessary part of doing business together.
synonyms: confidentiality agreement (CA), confidential disclosure agreement (CDA), proprietary information agreement (PIA), or secrecy agreement (SA)
A well-drafted NDA can be indispensable in protecting your idea, business and marketing plans, and other proprietary information by prohibiting disclosure and use of the information you share. It is a good idea for entrepreneurs to have an NDA on hand, ready to be executed.
Under what circumstances should you ask someone to sign your NDA? There are varying opinions on when you should have a signed NDA. Some people staunchly believe in having an executed NDA in place before sharing anything about their idea with anyone. On the other hand, you hear others (particularly VCs) insisting that they will not sign NDAs and that the value is not in an idea, but in the execution of the idea.
While there are merits to each of these arguments, we believe that you should consider a few factors to determine whether asking someone to sign an NDA is appropriate. Consider the following:
What information are you disclosing?
Would you consider the information a trade secret? (we will be written another blog post specifically on trade secrets)
If you consider the information to be a trade secret, you are required to maintain the secrecy of the information to receive protection under trade secret law.
If you are disclosing what you are doing instead of how you are doing it, you may not need to ask the person to sign an NDA. However, if you are disclosing the specifics of how your idea works, such that the receiving party could replicate the idea, you may want to have them sign an NDA.
You should also consider what type of information will be disclosed. If you are having a conversation with someone about your idea, that is less risky than providing written documents such as business plans, diagrams, or blueprints. If you are merely asking someone their feedback on the overall idea (I'm building a rocket to fly to the moon vs. Here is the design of the rocket, i.e. your "secret sauce"), then there may not be as much risk in sharing the idea without an NDA.
Who are you disclosing the proprietary information with?
How easy would it be for this person to use this information to replicate your idea? If your idea is to build a mobile app, it would be more risky to share that information with a mobile app developer than an insurance agent.
Analyzing the type of information being disclosed and the nature of the receiving party is a sound first step in determining if you should have an executed NDA in place. However, it is a good idea to consult your legal advisor for a second opinion to ensure you are effectively using the NDA to protect your proprietary information.
If you need assistance drafting an appropriate NDA or have questions about how to protect your proprietary information, feel free to reach out to us. Click here to contact YourCounsel.
"All achievements, all earned riches, have their beginning in an idea."
- Napoleon Hill