Non Disclosure Agreements

Posted on Posted in Investing, Legal, Mentoring

I have mentioned NDA’s in a lot of separate articles, so I thought I would outline the purpose and features of a good NDA and in so doing, point out the many mistakes everybody (including large corporations) make in constructing them.

A non disclosure agreement (or NDA) is a simple legal contract that permits two parties to enter into confidential discussions. This can be done without fear of either party relaying on information gleaned during such conversations to any third party without express written permission. It protects IP, confidentiality and commercial activities and allows exploratory discussions to be undertaken when the outcome is uncertain.

To do this, a good NDA should be written by a lawyer, but in such language that is understandable by any competent individual, without having to involve their own legal advice. The NDA should be open and mutual. That is, it covers all disclosures that are not currently in the public domain for both parties equally.

These are very simple objectives, yet few companies or law firms manage to achieve them. Many companies are so intent on protecting their own commercial interests, they don’t consider the other party and fail to make the contract mutual. Without realising it, this limits the potential to do business as the third party is not covered under the agreement and they become disinclined to discuss their business and what it can offer in return.

Another common mistake is that your lawyer will want to earn their money in constructing your NDA, so they will go to enormous lengths both in time and contract size to impress you. This, in turn, defeats the aim of allowing a simple legal framework, able to be signed at the start of a meeting, without any lawyers present, which protects both parties from public disclosure of private knowledge.

As an example, a recent interesting NDA I received from a well funded startup was genuinely mutual, yet it decided to define the topics that were covered. This meant that it prevented me, the third party, from disclosing anything that might fall outside the listed items in the agreement. As the items listed related to the intellectual property of the startup, it effectively nullified the mutual nature of the contract. I signed it, but they failed to find out anything about me, nor have they got the opportunity to seek future investment from me.

A good mutual NDA should be no longer than two sides of A4 and be easily understandable by any competent business person.

An alternative to an NDA for a specific meeting is to hold that meeting under the Chatham House Rule. This allows free speech which is protected from publication or attribution at a later date. It is normally invoked at the discretion of the chairman.

 

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