Non-Disclosure Agreements: What Startups Need to Know

Non-disclosure agreements (NDAs) are critical legal documents that protect a startup’s confidential information and trade secrets. As a startup founder, you’ll likely encounter NDAs in various situations, such as when hiring employees, collaborating with other businesses, or seeking funding from investors. Understanding the intricacies of NDAs is crucial for safeguarding your company’s intellectual property and ensuring its success.

What is a Non-Disclosure Agreement (NDA)?

An NDA is a legally binding contract between two or more parties that creates a confidential relationship. The parties agree not to disclose sensitive information shared during their business dealings. This information may include trade secrets, financial data, customer lists, marketing strategies, and other proprietary information. NDAs are essential for startups because they help protect their innovations and competitive edge. One of the most significant assets a startup has is its intellectual property, which can include inventions, designs, software, and trade secrets. By signing an NDA, the receiving party agrees to keep the startup’s intellectual property confidential and not to use it for their own benefit. This protection helps startups maintain their competitive advantage and prevents unauthorized use of their IP1.

It’s important to recognize that NDAs can only legally protect certain types of information. The receiving party are typically not protected by an NDA. For example, you cannot claim two main types of NDAs:

  • Unilateral NDA: In this type of agreement, only one party discloses confidential information to the other party. This is common when a startup shares its business plan with a potential investor or when an employer requires an employee to sign an NDA to protect trade secrets3.
  • Mutual NDA: This type of agreement involves both parties agreeing to keep each other’s information confidential. This is common in joint ventures, mergers and acquisitions, and other situations where both parties share sensitive information3.

Different Types of NDAs and When to Use Them

In addition to unilateral and mutual NDAs, there are other variations of NDAs that startups should be aware of:

  • Bilateral NDA: This is another term for a mutual NDA, where both parties agree to protect each other’s confidential information. These are commonly used in situations where parties are required to exchange a lot of private business information during negotiations, such as corporate takeovers, joint ventures, and mergers and acquisitions4.
  • Multilateral NDA: This type of NDA involves three or more parties where at least one of them will disclose information to the other parties. The disclosing party or parties will require the other parties to protect that information from further disclosure. Multilateral NDAs are often used in complex deals involving multiple stakeholders4.
  • Employee NDA: This type of NDA restricts employees from revealing trade secrets and business information5.
  • Company-contractor NDA: This type of NDA restricts hired contractors from taking business information and sharing it with competitors or using it for themselves5.
  • Inventor-evaluator NDA: This type of NDA restricts evaluators from stealing someone’s invention and patenting it as their own5.

When choosing the appropriate type of NDA, startups should consider the specific circumstances of the situation, the number of parties involved, and the nature of the information being shared.

When Startups Need NDAs

Startups typically use NDAs in the following situations:

  • Hiring Employees: When interviewing potential employees or bringing on new hires, startups often share insights into their future projects and unique methodologies. An NDA ensures that these individuals maintain the confidentiality of this information, thus safeguarding the company’s competitive edge6.
  • Collaborating with Other Businesses: When startups collaborate with other businesses or entities, there’s an exchange of data, resources, and strategies. NDAs ensure that the shared information remains exclusive to the partnership, preventing any unauthorized disclosures6.
  • Seeking Funding from Investors: When seeking funding, startups must reveal detailed business plans and growth strategies to potential investors. NDAs protect these details, ensuring that investors can’t share or misuse the information1.
  • Product Development: While bringing ideas to life, startups often engage with external designers, developers, and consultants. NDAs prevent these third parties from copying or sharing the startup’s innovations6.
  • Mergers and Acquisitions: When being acquired or considering a merger, startups delve into deep discussions about their finances, operations, and future plans. NDAs ensure that these sensitive negotiations stay confidential, preserving the integrity of the deal1.
  • Managing Bad Press: In situations where startups are faced with negative publicity, they may ask employees or other involved parties to sign NDAs to prevent the spread of potentially damaging information1.

Key Elements of an NDA

A well-drafted NDA should include the following elements:

  • Definition of Confidential Information: The NDA should clearly define what information is considered confidential. This may include specific details, such as technical data, financial information, and customer lists, as well as broader categories, such as trade secrets and business strategies1.
  • Obligations of the Receiving Party: The agreement should detail the receiving party’s obligations to protect the confidential information. This typically includes:
  • Not disclosing the information to third parties without consent.
  • Using the information only for the agreed-upon purpose.
  • Maintaining the confidentiality of the information using the same degree of care that they use to protect their own confidential information1.
  • Duration of the Agreement: The NDA should specify the duration of the agreement, which can range from a few months to several years, depending on the nature of the information and the relationship between the parties1.
  • Exceptions: NDAs should include exceptions for information that:
  • Is already in the public domain.
  • Is independently developed by the receiving party without use of the disclosing party’s confidential information.
  • Is required to be disclosed by law or a court order1.
  • Governing Law and Jurisdiction: The agreement should specify the governing law and jurisdiction that will apply in the event of a dispute1.

Common Mistakes Startups Make with NDAs

While NDAs are invaluable tools for startups, it’s crucial to approach them with a balance of caution and clarity. Some common mistakes startups make with NDAs include:

  • Overly Broad or Vague Terms: Without clear definitions, there’s room for misinterpretation, making it difficult to determine what exactly is “confidential.” This can lead to disputes and weaken the enforceability of the NDA. For example, an NDA that defines confidential information as “any and all information” is overly broad and may be unenforceable7.
  • Challenges in Enforcement: Even with a solid NDA, ensuring compliance can be tough. Legal actions against breaches can be costly and time-consuming, with no guarantee of a favorable outcome1.
  • Reputational Risks: An NDA that appears too restrictive can deter potential partners or employees. It might signal a lack of trust, potentially harming the startup’s image in the industry1.
  • Public Interest Disclosures: NDAs cannot prevent disclosures deemed in the public’s interest, such as whistleblowing on illegal activities. In such cases, enforcing an NDA might backfire both legally and in terms of reputation1.
  • Narrow Definitions of Confidential Information: Startups should avoid using narrow definitions of confidential information in their NDAs. For example, requiring that documents be marked “confidential” in order to be protected can limit the scope of the NDA and potentially leave valuable information vulnerable8.

Case Studies of NDA Disputes Involving Startups

Several high-profile cases highlight the importance of well-drafted and properly executed NDAs for startups:

  • Waymo vs. Uber: In 2017, Waymo, a self-driving car technology company, sued Uber, alleging that a former Waymo engineer had stolen trade secrets related to autonomous vehicle technology. This case demonstrates the importance of having NDAs in place with employees to prevent them from disclosing trade secrets to competitors1.
  • Jawbone vs. Fitbit: In 2015, Jawbone, a wearable technology company, sued Fitbit, claiming that Fitbit had lured several of its employees who then allegedly took sensitive information and trade secrets with them. This case highlights the need for robust and enforceable NDA clauses to protect a company’s trade secrets and confidential information from being used by competitors1.
  • Snapchat (Snap Inc.) vs. Reggie Brown: This case involved a dispute between Snapchat and one of its co-founders, Reggie Brown, who claimed that he had been unfairly ousted from the company and that his contributions to the app’s development had been stolen. This case emphasizes the importance of having clear agreements in place between co-founders to protect their respective contributions and ownership rights1.
  • The Facebook Winklevoss Dispute: In 2003, the Winklevoss twins hired Mark Zuckerberg to help build a social networking site called HarvardConnection. Without an NDA in place, they openly shared their idea with Zuckerberg, who then launched “TheFacebook,” a similar concept. This case demonstrates the importance of NDAs in protecting ideas and preventing disputes, especially in the early stages of a startup9.

Impact of NDAs on Startup Fundraising and Hiring

NDAs play a significant role in startup fundraising and hiring. When seeking funding, startups often need to share confidential information with potential investors. NDAs help protect this information and ensure that investors do not misuse it1. Similarly, when hiring employees, NDAs can protect trade secrets and other confidential information that employees may have access to10.

However, it’s important to strike a balance between protecting confidential information and not deterring potential investors or employees. Overly restrictive NDAs can create a negative perception and hinder a startup’s ability to attract talent and funding. Studies have shown that VCs rarely sign NDAs due to deal flow volume and the risk of legal complications with similar investments11.

Legal Requirements for NDAs in Michigan

In Michigan, NDAs are governed by state contract law and the Michigan Uniform Trade Secrets Act (MUTSA)12. Some key legal requirements for NDAs in Michigan include:

  • Legitimate Business Interest: Enforceable NDAs must be supported by a legitimate business interest, such as protecting trade secrets or confidential information13.
  • Reasonable Scope and Duration: Confidentiality obligations in NDAs cannot continue indefinitely. The scope and duration of the NDA must be reasonable and tailored to the specific circumstances13.
  • Clear Definition of Confidential Information: The NDA should clearly define what information is considered confidential to avoid ambiguity and ensure enforceability14.
  • Notice Required by Federal Law: The agreement must provide notice regarding immunity from liability for limited disclosures of trade secrets under the Defend Trade Secrets Act of 201613.
  • Choice of Law and Jurisdiction: It’s important to include a choice of law and jurisdiction provision in NDAs. This can help ensure that any disputes are resolved in a favorable jurisdiction and under familiar laws12.

Sample NDA Templates for Startups

Several online resources provide sample NDA templates that startups can use as a starting point for drafting their own agreements. These templates can be helpful in ensuring that the NDA includes all the necessary elements and is tailored to the specific needs of the startup. Some examples of these resources include:

  • LegalTemplates.net: This website offers a free NDA template in both PDF and Word format15.
  • Pillar VC: This venture capital firm provides a one-way NDA template that can be used when one party is disclosing confidential information to another16.
  • Startup Commons: This platform offers a free Confidentiality Agreement (NDA) template that can be edited for personal needs17.
  • LegalZoom: This legal services company provides an NDA template specifically for founders18.
  • LegalNodes: This platform offers a free NDA template designed for startups in both common and civil law jurisdictions19.

It’s important to note that these templates are meant to be used as samples and may not be suitable for all situations. Startups should always consult with legal counsel to ensure that their NDAs are properly drafted and comply with applicable laws.

Conclusion

Non-disclosure agreements are essential legal documents for startups to protect their confidential information and trade secrets. By understanding the different types of NDAs, their key elements, and common mistakes to avoid, startups can ensure that their intellectual property is adequately protected. It’s crucial to work with legal counsel to draft NDAs that are tailored to the specific needs of the startup and comply with Michigan law. This includes ensuring that the NDA has a legitimate business interest, a reasonable scope and duration, a clear definition of confidential information, and a choice of law and jurisdiction provision. By taking these steps, startups can safeguard their innovations, build trust with partners and investors, and pave the way for continued success.

If you are a startup founder in Michigan and need assistance with drafting or reviewing an NDA, we encourage you to contact Tishkoff PLC. Our experienced attorneys can provide guidance and ensure that your NDA is legally sound and effectively protects your company’s confidential information.

Works cited

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