“Ten years ago, it was not unusual for entrepreneurs to request potential investors to sign nondisclosure agreements. But today the agreements are largely considered a thing of the past. In fact, some investors say they walk away from a founder who even suggests signing one.”
Eilene Zimmerman written in the New York Times
Why More Start-Ups Are Sharing Ideas Without Legal Protection
Whether it is developing a new business relation, finding potential investors or working with customers, NDAs are an important tool in the work environment. They enable a sense of security and trust that ensure information disclosed to new entities remains private – a strong basis for creating trust in a new found business relation. In a previous article, ‘The Value of Non-Disclosure Agreements for Innovation’ we explored the benefits of signing an NDA prior to conducting business.
Nevertheless, many people still take offence when asked to sign one. The typical response that is brought forward points out the lack of trust between the two parties and creates a defensive attitude towards the conversation. Here, we would like to argue that it’s not about the lack of trust, but rather that non-disclosure agreements are about being professional. In order to have a fruitful conversation and ensure that business proceeds without any animosity, we need to understand how NDAs bring a degree of professionalism and objectivity to the table.
Just like anything in life, there is a right and a wrong time to present legal documents. For example, asking for an NDA before participating in an accelerator or pitching a business idea is a big ‘no-no’. It could make or break the business relationship you are attempting to establish. Especially having to sign an NDA simply to discuss a business idea seems to some as excessive. As previously described, business relations need to continue without any animosity. Presenting NDAs can sometimes create unnecessary friction or tension.
So when is it the right time to present an NDA and how does it relate to professionalism?
It is impossible to pinpoint an exact time and place to engage in an NDA but generally, a business should only present an NDA if there is truly commercially sensitive information being discussed. Otherwise, why would you need the NDA? The data that an NDA will protect is not an idea, design or concept – as that belongs to patent law. These types of ideas require registration of some kind with the local patent authorities. What an NDA will protect is trade secrets and empirical data. Empirical data will protect information such as the number of clients the company serves and their personal preferences. Information that would be very beneficial information for competitors in the market.
Accordingly, it would not make sense to sign an NDA for a start-up pitch.. But definitely if your start-up is entering into a joint venture with another company. You want an NDA when you’re engaging in a serious conversation to shape the collaboration and set it in the right direction.
Usually, there is a clear purpose for an NDA. By the time truly commercially sensitive information comes up, you may have had a chat with the company or described an interest in collaborating. An NDA shouldn’t be the first thing that is requested from the counter-party without having some notion of where the business relation is going. But when the NDA is being requested, that is when the business relation becomes more ‘professional’, so to say. Talking about a vision and mission of your company is not the same as getting into the nitty-gritty details of the business.
A professional business relation develops with time and is only possible when the collaborating parties get into the details of the business. To get into those details, some protections should be in place to minimize the risk if the relation doesn’t work out. Just like a health insurance package, you get one ‘just incase’, not knowing whether you will actually need it. For more information regarding the benefits of an NDA, check out this article.
Having someone sign an NDA shows a willingness to cooperate and commitment to the working relation. It may reassure the requesting party that the singing party is a professional entity. They value the information they are about to receive and recognize the value of such a document.
When the counter party shows significant resistance, it may mean two things:
i) they are not a company/entity you want to continue working with. Clearly they don’t value sensitive information the same way as your company does. Essentially, they don’t take confidentiality seriously.
ii) they don’t want to be liable for sharing the sensitive information. They may have the intention to extract information with any agreement in place.
As the title states, non-disclosure agreements are not about lack of trust, but are about professionalism. Companies should sign NDAs when dealing with commercially sensitive information. An NDA is a part of the growth of a business relation. The further along in the business relation you go, the more technical the information becomes. NDAs benefit all signatory parties, describing the protections they are afforded and consequences of non-compliance. Meanwhile, resistance illustrates a lack of professionalism and signals that this business relation is not meant for you.
It is difficult to change people’s opinions on the matter. How does your company manage with NDAs and difficult cases? Share your tips and advice to the other members of the community by commenting on this post or sending us an email at firstname.lastname@example.org. We’d love to hear from you!