Liability & indemnity

The benefits of non-disclosure agreements for entrepreneurs

Non-disclosure agreements (also known as NDAs or confidentiality agreements) can be used as tools to protect confidential information when you need to share it. Here, Grid Lawfounder David Walker reveals how small business owners and entrepreneurs can use NDAs to their advantage.

As an entrepreneur, there are many occasions when you may need to share confidential information, but will be reluctant to do so.

You may be worried that a competitor will steal your ideas, copy your new branding or just take your trade secrets to improve their own business and gain a competitive advantage.

As a solicitor, I hear these concerns all the time but thankfully, there’s an easy way to quash these fears. You can use non-disclosure agreements, which can protect your company’s confidential information each time you need to share it.

The trouble is, many people debate the value of non-disclosure agreements. They worry that even after signing non-disclosure agreements, their confidential information may still be lost or stolen. But, are they right?

Are non-disclosure agreements worth the paper they’re written on?

In my opinion, non-disclosure agreements can be extremely valuable, but only if used in the right way. In this article, Im going to explain how to get the best out of them.

What do non-disclosure agreements protect?

Information that isnt publicly available will almost certainly be confidential and so can be protected by non-disclosure agreements. For example, business plans, details of new technology, and certain pieces of financial information can all be confidential. You can disclose this information under the terms of a NDA and the person you disclose it to is under a legal obligation to keep it secret.

Sometimes, however, it’s not clear whether your information is confidential and whether it can be protected in this way. Think about your client database as an example it may consist almost entirely of public information such as names, addresses and email addresses.

It may contain other information too, such as your client’s purchase history which they would be free to share and make public without asking you.

Can this be protected by non-disclosure agreements?

Potentially, yes. The fact that you have brought all of this information together and collated it into a single resource could make the information confidential. This is because it would be extremely difficult (if not impossible) for someone to piece it all together, even though most of the information is public record. This is what makes databases such as these so valuable and why they can be protected by non-disclosure agreements.

When should you use non-disclosure agreements?

You should use non-disclosure agreements whenever you allow someone access to your confidential information and you need that information to remain a secret.

Very often, a prospective client will insist you sign an NDA before you start discussing the services you could provide them. They may be concerned about disclosing sensitive information that you could take to a competitor or use for your own advantage, if you don’t reach an agreement to work together.

Alternatively, you may be considering buying a business (or selling yours). This will almost certainly involve the disclosure of very sensitive information and so a NDA will need to be signed before negotiations can take place.

If you have invented a new piece of technology and think there’s a possibility that you could patent it, you absolutely must have non-disclosure agreements signed before disclosing details about it to anyone.

One of the criteria for obtaining a patent is that the technology must be new. This means that details of it must not have been shared publicly with anyone. If they have, the law is very clear, the technology is no longer new and you can’t obtain a patent for it. The only way to share details of the technology without it becoming public is to have someone sign an NDA beforehand.

As you can imagine, not being granted a patent for a new piece of technology could be disastrous for your business.

What should you look for in a non-disclosure agreement?

Many business owners will sign an NDA without taking legal advice. They think it’s just a formality and are completely unaware of the traps that may be hiding in them. So what should you be looking out for?

First, look at the definition of confidential information. This will tell you what is included and what is not. Often there is a general description about the types of information that should be kept confidential, but sometimes it’s very specific so there’s no doubt about what the agreement protects.

Next, there should be a very clear purpose for which the confidential information can be used. For example, you may be permitted to use the information to evaluate an opportunity for the parties to work together, but nothing else.