Using an NDA in your small business
A non-disclosure agreement, also known as an NDA, is becoming an increasingly common in a small business when discussing confidential information.
NDAs, or confidentiality agreements, are used to help protect confidential information such as trade secrets, new ideas, business plans and other commercially sensitive information.
The aim of an NDA is to stop unauthorised use of certain confidential information.
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NDAs are a useful tool for setting boundaries with new business relationships, allowing you to describe precisely what information you will share, how it can be used and who it can be shared with.
In what circumstances is an NDA appropriate?
You should use an NDA when you need to protect information that is valuable to your business.
When deciding if an NDA is appropriate, ask yourself:
Is the information ‘secret’ in the first place?
If the information is widely known or publicly available, the information is not confidential. NDAs are not enforceable against publicly available information.
Is it appropriate to share the information?
For initial meetings, informal discussions or sales pitches, you often don’t need to reveal business-critical information.
Keep the initial discussions limited to need-to-know information that will not harm your business if discovered by third parties. You can consider using an NDA once discussions move beyond the introductory conversation.
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Could sharing this information widely cause harm to my business?
If the answer is yes (or even maybe), propose an NDA before continuing the discussions.
Deciding when to use an NDA will involve careful consideration of the potential business relationship, how much you trust the other party, the value of the information being shared and the impact of it being shared without your permission.
How important are NDAs for protecting my growing business?
The best way to ensure your information remains confidential is to not disclose it at all. But that is not practical if you want to share your ideas with prospective business partners, suppliers or investors to help grow your business.
If you don’t have an NDA, and your confidential information is shared without your permission, you may rely on the common law “breach of confidence” which applies to information which has a “necessary quality of confidence” disclosed “in circumstances importing an obligation of confidence”. However, it can be difficult to satisfy these requirements, and you will usually need to engage lawyers to enforce them.
It is safer to rely on a well-written NDA. This should remove any doubt as to whether the recipient was aware that the information was confidential and can provide you with a legal remedy if there is an unauthorised disclosure.
NDAs alone are rarely enough
However, NDAs alone are rarely enough, and they work best as part of a wider strategy to protect your business assets.
While NDAs can help hold a “rogue leaker” accountable, they are unlikely to fix the harm caused by the disclosure. Once someone has shared your secret recipe, it cannot be made secret again. It is important to manage your methods of disclosure as well as having a carefully drafted NDA in place. You may wish to consider using data rooms, watermarks and encryption, and make sure you have the ability to restrict access to documents previously disclosed. If you are having a face-to-face meeting, you may even consider providing physical, hard copy documents only (as long as you collect them at the end of the meeting).
Could I harm negotiations by using an NDA?
NDAs are very common in the business world, and many businesses will be familiar with them. They show you are serious about protecting your business, and help reinforce the message that what you are disclosing is to be kept under wraps.
However, they can represent unwelcome “red tape” when pitched at the wrong time. A good example of this is when approaching investors. Many investors consider multiple deals at a time and often refuse to sign NDAs so they are not restricted from engaging in other investments. This is usual market practice.
The key to protecting your business without harming negotiations is finding the right balance.
During initial discussions, investors or other partners are looking to get a feel for your concept and whether you can achieve your aims. The phrase “share the cookie, not the recipe” is commonly used when discussing NDAs and is worth remembering. You should aim to promote your business idea without revealing so much that someone else can replicate it.
Once you have found someone who is keen to commit to your business, then you can consider using an NDA before sharing more sensitive information. However, it is worth remembering that confidentiality obligations will usually be included in a term sheet or investment agreement, so your NDA may not be needed in these circumstances.
What terms should I include in an NDA?
A well-drafted NDA will include the following:
- Definition of confidential information: this is another careful balancing act. You must ensure this is broad enough to cover everything you want to keep secret. However, this definition can only apply to truly confidential information, as once the material loses the quality of confidence (such as becoming publicly available), the NDA is unlikely to be enforceable
- Permitted purpose: clearly specify the purpose for which the recipient may use your confidential information.
- Disclosure: clearly define who the recipient can share the information with (usually employees, consultants and advisers such as lawyers) or you may wish to provide a list of specific individuals who can receive the information (and these people should also be bound by confidentiality obligations)
- Duration: how long will the NDA apply? This must be realistic otherwise the NDA may be unenforceable (and the receiving party may not agree to it). A never-ending obligation to keep the information secret is rarely likely to be appropriate or enforceable in law. The duration should be tailored to the nature of the information, and how long it is likely to remain of a confidential nature from a commercial perspective . For example, information relating to a new product could be protected until the product goes to market and is therefore publicly available.
It is important to remember that NDAs are only one tool at your disposal for protecting your sensitive information and should form part of a wider strategy to keep your information confidential.
It is equally important to limit the information you share, keep it on a need-to-know basis, and do your due diligence on your prospective partners – do you trust them, and do they have a good track record? These factors, together with a well-drafted NDA, will help set you up for positive discussions to help grow your business.
Brett Lambe is a senior associate at Ashfords LLP