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How to Use a Non-Disclosure Agreement

April 28, 2011
Startup Advisory

So you have a great idea that fills a market need and you are at the point of getting others involved. But you don't want anyone to steal your idea or your plans. One solution is to use a Non-Disclosure Agreement ("NDA") with your potential business partners and suppliers.

NDAs – a Blessing and a Curse

The story goes that when IBM developed its earliest PC, it contacted Bill Gates to develop an operating system. IBM also approached a more experienced software developer, Gary Kildall. IBM and Kildall's people haggled over NDAs, each refusing to sign the others NDA. IBM finally had enough and went back to Gates, who apparently signed IBM's NDA without hesitation. The rest is history. The moral of the story is that NDAs can be useful, but they can also get in the way of achieving your business objectives.

What is an NDA?

An NDA is an agreement in which you agree to disclose certain information and a third party agrees to keep that information confidential. An NDA can be one-way (only one party discloses information) or mutual (both parties disclose information).

Most NDAs include these terms:

  • What information is confidential
  • For what purpose the confidential information can be used
  • When the confidential information can be disclosed, if ever
  • To whom the confidential information can be disclosed, if anyone
  • When the confidential information must be returned
  • What remedies are available if someone breaches the NDA

When should you use an NDA?

NDAs are useful tools, when you can get one and when you really need one. It is not practical to ask everyone with whom you talk to sign an NDA, and it would severely disrupt your efforts to get your idea off the ground. In fact, if you approach an angel investor or venture capital firm, they might refuse to sign an NDA until you are in serious discussions.

Instead, you can start by discussing your idea in generic terms to better understand the market and see who is doing similar things. You will be better able to discover potential competitors as well as potential partners and customers.

When you are ready to discuss the "how" and all of the details, then you should use an NDA where practical. Others may have seen the same market opportunity, but have not devised a workable solution. The exact nature of your solution can be very valuable, and you should have an NDA in place before you disclose that information to a third party.

Further Information

We invite you to meet with a Varnum attorney to discuss how we can help you achieve your objectives.

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