Should your start-up use a non-disclosure agreement (NDA)?

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Still from Social Network, illustrating NDA

Whether you’re explaining a great idea to a potential investor or discussing your plans with contractors, you’ll sometimes need to share sensitive material. The IoD’s Information and Advisory Service (IAS) explains how to keep it confidential

When a firm needs to discuss commercially sensitive matters with another organisation or individual, it will often ask that party to sign a confidentiality agreement. Before you assume that this will automatically serve as a legal safety net, it’s worth understanding that whether or not secrets can be protected by the law depends very much upon their nature. Here’s an introduction to confidentiality agreements from the IoD’s Information and Advisory Service (IAS)

What types of confidentiality agreement exist?

Also known as non-disclosure agreements (NDAs), such documents can take one of two forms: mutual or one-way. Use a one-way NDA if you are the sole party disclosing confidential material and a mutual NDA if both parties are.

When should you use one?

Consider using an NDA if you believe that the information under consideration is not known outside your company and its disclosure could help its competitors and/or harm your business. Such protection would, for example, be warranted in respect of: details about your suppliers and clients; financial information; marketing plans; pricing policies and other commercial data; and industrial inventions, processes and knowledge.

When are they inappropriate?

An NDA will be worthless if the material it covers is already in the public domain, the other party has previously had access to it or you are legally bound to publish it anyway. Some types of information – salary data, for instance – may be sensitive but are not regarded as trade secrets that the law will protect in certain situations, although their unauthorised disclosure may well constitute a breach of data protection legislation.

How should a start-up use a confidentiality agreement?

The rule of thumb is that you don’t ask venture capitalists or angel investors to sign one. The very nature of their business means that they could be speaking to several rival businesses at the same time. If every start-up seeking funding were to present them with an NDA, they would soon be swamped with legal documents. You will be better served simply by doing your homework on a potential investor before deciding what material to share with it.

Should your staff sign them?

Where an employee could gain access to sensitive data – a worker at an NHS trust, for example – that individual should be asked to sign an agreement. Employers in sectors where people change jobs especially frequently may also find NDAs useful. In the hi-tech industry, for instance, a developer could take information from your firm to a direct competitor or use it to set up their own business. NDAs exist to protect you against this.

What happens when someone breaks an agreement?

An NDA should serve as a clear deterrent, but trying to prove that its terms have been breached can in many cases be time-consuming and costly.

How the IAS can help you

  • The Business Information Service (BIS) can supply a template agreement.
    Call 020 7451 3100
  • The Directors’ Advisory Service (DAS)can give guidance on confidentiality matters and review draft NDAs.
    Call 020 7451 3188
  • The legal helpline can answer quick queries about confidentiality law.
    Call 0870 241 3478*

IoD members are entitled to 25 enquiries a year to the BIS; four sessions with a DAS adviser; and 25 calls to both the legal and tax† helplines. For further details visit iod.com/information or email businessinfo@iod.com

* Quote your membership number
† Quote your membership number and reference number 33337

IAS

About author

Ryan Herman

Ryan Herman

Alongside his work for Director, Ryan has written for SportBusiness International, VICE Sports, Populous, Audi and Gallop Magazine and was previously editor of Sky Sports Magazine.

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