While all non-disclosure agreements (NDAs) cover certain fundamentals, the way these fundamentals are covered will vary. To illustrate this, let’s compare how some core provisions of a non-disclosure agreement might be structured in a few commonly encountered business contexts, namely working with service providers and pitching to investors.
Service Providers are bringing their skill, expertise and resources to the table to work for your business. Like employees, they will generally need to have access to your confidential information to bring about a result or generate a work product. They may bring their own confidential information into the mix, and will almost always generate new confidential information in the course of delivering services to you. They know they need to agree to preserve confidential information relevant to your business in order to gain your trust, and that if they don’t abide by those obligations their professional reputation, and therefore future business prospects are at stake.
Given the foregoing context, the provisions of an NDA for a service provider often take on the format of a one-way NDA where the emphasis isprotecting the interests of the business owner. In this kind of NDA, the provisions relating to the ownership of confidential information and intellectual property, and the management of confidential information will be fairly detailed. Especially if the service provider has been hired to contribute to the development of a technical solution for a business or product, the NDA should include provisions which obligate the service provider to:
- Disclose in detail all relevant new (confidential) information;
- Assign the rights to the new (confidential) information, work products and related proprietary rights to the business owner (without giving away rights which the service provider owned coming into the relationship);
- Execute further documentation to confirm the assignment of rights in ‘2’ and support the potential future enforcement of those rights against third parties, if necessary, at the business owner’s expense;
- Unless related to the purpose of the service provider’s engagement, refrain from copying, distributing and reverse engineering confidential information without the permission of the business owner; and
- Provide a declaration that all confidential information in its possession has been returned or destroyed once the service provider’s engagement is concluded.
Investors are bringing money and, in some cases, the benefit of their experience to the table. While they may be interested in how your business is “good” for the public they are at the same time very focused on knowing how investing in your business is going to benefit them. Sophisticated investors are up front about minimizing their obligations so that they can explore dancing with a lot of potential opportunities before getting married to any. They also want to be able to easily annul or divorce from a business relationship if things don’t work out.
Access to your confidential information is, therefore, largely about assessing and re-assessing risk and ensuring a return on the investment made into your business. The kind of information needed to do this will change over time as the relationship progresses through different stages. Accordingly, the obligations between you as a business owner and an investor with respect to confidential information may change and require review as certain milestones are reached.
During the early stages when initial discussions are taking place, investors may not need to have juicy, confidential details to understand the value proposition you are putting forward. Moreover, investors will not generally need to share much of their confidential information with you, not at least until your wagons are going to be hitched to one another. As a result, if an investor is resistant to the idea of signing a NDA you as a business owner have a choice to make – either walk away from further discussions or be very selective about what information you disclose. The idea here is to avoid providing confidential information, or if some confidentiality is to be lost, ensure it is not so much so as to leave your business exposed and you powerless to do anything about it.
Once an investor decides to do a due diligence review of your business to formalize an investment, however, a NDA becomes a must. As always, the provisions of a NDA have to be clear about the ownership of confidential information and intellectual property, and the management of confidential information. Unlike the service provider context, however, an investor may not really have new (confidential) information to disclose that is relevant to the business, and even if he or she does, there is no compelling reason for the investor to agree to assign rights in that information to the business owner at the due diligence stage. An investor will instead want to hold onto proprietary rights she or he contributes and request a two-way (mutual) NDA where the rights and interests of both parties in confidential information are respected and maintained. In other words, each party would own what it contributes, be obligated to refrain from copying, distributing and reverse engineering confidential information without the permission of the other party, and to provide a declaration that all confidential information in its possession has been returned or destroyed once the relationship is concluded.
Finally, if all goes well at the due diligence stage and a business agreement is formalized with an investor, the parties can agree to further adapt their obligations under the NDA in order to carry forward an agreed upon business plan.
Next month, in the final part of this post series we will dive deeper into the world of trade secrets, a particular kind of confidential information, which can be both the most valuable and yet under- appreciated assets available for a business to leverage.