10 Things You Must Answer Before Signing a Non-Disclosure Agreement
Whether you are hiring employees, looking for investment, working with a vendor, or looking to sell your business, you must use a non-disclosure or confidentiality agreement (”NDA”) to protect your most vital asset, your intellectual property. Here is a list of 10 questions you must be able to answer before signing one of these agreements.
Have you ever sent your customer list to a mail-house to send out some promotional material? Does your mail-house have the right to keep the list or use it for its own purposes? How do you know?
Have you ever had an employee leave your company full of information about your vendors, your customers, and your company processes? Can they sell that information to your competitors? How do you know?
Have you ever had a good idea that you wanted to develop and needed help from others in order to do so? Can they steal your idea and create it on their own? Have you just handed them a license, or permission, to do so? How do you know?
Ok ok…Now you are starting to understand why these agreements are so important. So before you draft or sign one, you need to be able to answer the following 10 questions:
- Who are the parties bound by the agreement? If you sign an agreement by X company, does that mean that all of their employees are bound by the NDA? Not necessarily, unless you specify.
- Is it a mutual or unilateral agreement? Are both parties required to keep information private, or is the agreement entirely one-sided?
- What is the purpose of the agreement? Is it to evaluate the viability of a business? Is it to perform a specific task, as in the case of the mail-house? Defining the purpose will help define the proper use of the confidential information. Are you creating a license for the other party to use your information? Can they create their own things from it? Are you entering into a collaborative partnership moving forward? If these options don’t appeal to you, your agreement should spell out that they are not the case.
- What is confidential? Has the agreement properly defined what is to be kept secret? Is it your data? Idea? Processes? Should the fact that you are even having this conversation with the parties on the other side be kept confidential? Many folks looking to sell their business will try to keep that potential as confidential as possible.
- What is the term? How long does this information need to be kept private? Is it reasonable?
- How will the information be protected? Is it going to be kept in a safe place? Is it only going to be shared with a specific few individuals? Will it be shared with anyone? What is the standard of confidentiality that needs to be followed?
- What are the exception? Confidentiality agreements require a
number of exceptions, including information that was previously known to the person receiving it, information publicly available, information provided to the person receiving it by an independent third party that had the right to share, etc. - Can the NDA be transferred? Can either party assign its rights in the agreement to any other party? Why would this benefit your business? Why would you want to prevent it?
- What is the penalty for violating the agreement? Most NDAs will contain a provision allowing for an injunction, but some also contain a liquidated damages provision, or a predetermined amount of money that the discloser has to pay to whomever’s confidential information was improperly used.
- How will the information be disposed of? Does the recipient have to give it back? Does some sort of varification need to be administered to make sure they no longer have it? What happens to the confidential information after it serves its purpose?
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