Non-Disclosure Agreement: So What’s The Point?

Clients often are concerned, and rightly so, about disclosing their ideas, plans, business models, etc. to potential partners and investors. Oftentimes I’m asked to prepare, or more often download one of the many forms online, a non-disclosure agreement “NDA.” This agreement usually sets forth various terms with regard to the use of any information or materials disclosed at a meeting.

There are two major obstacles to overcome with the NDA. The more practical concern is the high degree of unlikelihood that any sought after suitor will actually sign the document. Any venture capital firm or savvy angel investor sees many business plans and models from entrepreneurs believing their plan, model is the greatest thing since sliced bread which of course most of the time it’s not. As the saying goes “whoever has the gold makes the rules” so one would be wise to understand that NDAs will often be frowned upon by this type of investor. That said, nothing precludes adressing the issue at the meeting prior to disclosure and sending a follow-up letter indicating the info is confidential and only disclosed to facilitate a business relationship and that any other use or disclosure is prohibited.

The second point reflects a misunderstanding as to what is protectable intellectual property. As a general rule your ideas, no matter how wonderful, are rarely protected. However a utility patent will protect an invention or discovery of any new and useful process, machine, manufacture or composition of matter or any improvement thereof. So if your idea has resulted in such, or in case your unsure, it would be wise to seek legal counsel who would be able to file at least a provisional patent application on your behalf. The same rule of thumb would apply to trademarks. Any creative word symbol or device that will serve as the trademark or brand for your product or service should be registered with the USPTO. An intent to use application can be filed to protect the mark provided the mark is used in commerce within 6 months or later with an extension filed. IP consisting of trade secrets is more difficult to protect as disclosure for evaluation is often required. Here a well-crafted NDA is very appropriate and highly beneficial.

Most importantly, know who you’re dealing with. Firms have reputations, styles and customs that are known in the industry. Part of your due diligence should involve vetting potential customers, creditors and investors anyway. This knowledge coupled with an NDA can serve to keep the relationship fluid and above board. However an NDA is not a panacea and a good dose of common sense should accompany all business dealings.