You may believe that the Non-Disclosure Agreement (“NDA“) is the first bullet to have in the chamber, however, it is important to recognise that it may not always be the most appropriate approach.
An NDA is a valuable document, which provides important protection to the discloser, provided that the content fits the particular circumstances and recipient
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This article aims to provide you with some practical considerations when setting up your NDA and approaching different recipients.
First off, what is an NDA? It’s a document that serves to protect you when disclosing confidential or proprietary information to a recipient, by means of placing confidentiality and restrictive obligations on the recipient, as relates to the disclosed information.
An NDA often places further restrictive obligations on the recipient, which may include a restraint on competition or an undertaking against soliciting or enticing any employees of the discloser, to indemnify and cover the discloser from any harm it may suffer from a breach, or it may even go so far as to place strict assignment of intellectual property obligations on the recipient.
In my view, the legalities are one thing, but perhaps the most important element of an NDA is to be aware of who your recipient is and to ensure that the terms of your NDA match them and their accompanying circumstances. A further consideration is to determine why you require the recipient to sign the NDA.
Should you be in the midst of a merger or acquisition, or if you need to approach a competitor to engage in discussions for a possible joint venture, or to contract a software developer who will work closely with your employees and require access to your confidential back end information, then an ironclad agreement makes sense and in many cases will be recommended.
If you are approaching a venture capital fund, however, your approach will most likely require a little more finesse.
The Investor and I
It is interesting to consider the psychology behind approaching an investor and the nature of investments in general. An investor may be looking at several enterprises that overlap with yours, so the investor may inevitably breach any NDA you agree to that seeks to limit the investor’s business prospects.
If both parties genuinely wanted to engage with one another in good faith, a strict NDA can become an unnecessary deterrent. Further to this, this NDA may prevent one investor from speaking to another, who may be better positioned to help you and your enterprise. The problem is that by the nature of their profession an investor has probably seen four NDAs (and possibly your idea – or an iteration thereof, at least), before lunch.
If a serial investor had to sign every NDA that a potential entrepreneur slid across his or her desk, then they probably wouldn’t be able to sneeze without a potential lawsuit. Added to this, the prolonged time it may take for the legal team of an investor to review and recommend changes may hike up your legal fees, prolong the formalities before you get to pitch or mean you fall by the wayside and do not get to pitch at all.
Again, I am not warning against having an NDA in place but recommending an awareness of your recipient. If you need some confidentiality obligations in place, consider tweaking the NDA to make it easy for your recipient to conclude it. In short, check that it is necessary, appropriate, and specific.
More than just words on a page
Assuming one is necessary, there are especially important clauses in the NDA to consider. Understanding these will help you to tweak the agreement.
The content of any agreement must match the circumstances of your matter, or else it could run the risk of some terms being unenforceable or not applicable to the particular scenario and, as mentioned above, will in most cases lead to a need to review the document, thereby prolonging the negotiations and increasing costs. A template NDA is therefore never the best approach.
- Is the NDA mutual in that confidentiality and related obligations apply to both parties equally, or is the NDA in favour of one party only? A one-sided NDA makes sense in scenarios where you have the negotiating power, but it does not make sense in a scenario meant for collaborative discussions.
- Is the duration of the NDA for a specified period of time or indefinite? It is important to note that the NDA will protect those disclosures made after the signature date unless specified, so be careful what you disclose and when, or cater for this in your NDA. Try establishing what you are disclosing and if it requires indefinite protection. If you can tie someone in for a shorter period before launching, this of course makes it psychologically easier for a recipient who may be seeing red flags during his or her internal risk assessment process.
- What is the purpose behind the disclosure of information? Remember that the NDA, and the confidentiality obligations, will be tied to this purpose. There must always be a thread of reasonableness in your agreements. If too broad or uncertain, a clause could be deemed unenforceable or make the argument of whether there has been a breach less clear. The easier it is to make an argument (due to clear drafting) the lighter it will be for your pocket, otherwise, the costs of trying to enforce your NDA may outweigh the value of the information that you are trying to protect.
- What are the specific obligations placed on the recipient? Usually, this includes keeping the information confidential, not disclosing it or making copies of it, using the information only for the specified purpose, and informing the disclosing party upon becoming aware of a suspected or realised breach. But remember, there are always exceptions to the rule. You cannot protect confidential information if it is already public knowledge or if it was already known to the recipient. Furthermore, there must be some leniency for the parties, which allows the recipient to at least disclose information to stakeholders in its operation, or its professional advisors, on a need to know basis. This is usually recorded in your NDA.
- Will your agreement have any restrictive provisions relating to trade or personnel? Is the information of such a calibre and are your operations at such a sensitive stage that you need to restrain the recipient from competing with you for a period of time? Be aware of what you are disclosing and who the recipient is; this would make sense if you are approaching a competitor to start a joint venture but doesn’t make sense when you approach a serial venture capital fund, for example. A slightly less invasive protection could involve a non-solicitation clause, which aims to prevent the recipient from poaching your employees or team members.
- Will the agreement require the recipient to indemnify the discloser from any breach of the NDA and what warranties is the recipient obligated to provide to the discloser? Be aware of who the recipient is and be careful of the shotgun approach (rather opt for the sniper). If the recipient has to make extensive warranties that outweigh the importance of the information, it may result in negotiations breaking down. Try to distinguish between early-stage or less important disclosures on the one side and sensitive disclosures or more important transactions on the other.
- Finally, what remedies will the discloser have at its disposal should the recipient breach the NDA? It is often very difficult to quantify damages in cases of a breach of confidentiality. What is crucial here, however, is to secure the right to claim specific performance. This means that you will be able to approach a court and get an order forcing the recipient to zip his or her lips if there is a potential or actual breach. It may be possible to simplify the breach claim by agreeing to a pre-determined liquid claim. Practically though, this may delay the negotiations or scare away the recipient entirely, as it is rather out of the ordinary to agree to. Furthermore, the question must be asked, to what extent are you really protected if you are able to secure an order of specific performance, but the damage is already done?
Ready to approach the negotiation table?
Practically, it is your job to ensure that the information you disclose is clearly distinguishable as confidential and that you do not knowingly release anything to the public. It is also important to understand the distinction between your trade secrets and confidential information because disclosing your trade secret, even with an NDA, could spell ruin if you are not careful.
An NDA is a great tool if you pay attention to the recipient and the content. But remember, this is not a silver bullet and you need to think both legally and commercially when approaching someone with one. If you are uncertain or need a little help panel beating an NDA, be sure to ask us for advice.
Do not treat an NDA like a handshake, and do not treat a handshake like an NDA.
This article was written by Jacques Stemmet, Associate at Dommisse Attorneys.
Featured image: Cytonn Photography via Unsplash
