NDAs – what’s the point?
A non-disclosure agreement (“NDA”) or confidentiality agreement is a legally binding agreement that can be used between commercial parties to protect confidential or commercially sensitive information.
When should I use an NDA?
An NDA should be used to facilitate information sharing between parties. The classic example is during an M&A process, where the Seller is giving sensitive commercial information about the Target company to a potential Buyer. The Buyer will often be a competitor or an investor that might invest in similar companies, and so the Seller will want to make sure that it is protected. The NDA will set plenty of terms, the most important of which will govern how each party can use the information that is shared and how long the information must be kept confidential.
You should try to agree an NDA with a counterparty as early as possible in any negotiations. Don’t worry though if you have already started engaging with another party though! It is a standard term of many NDAs (including ours), to have the agreement apply retrospectively to any information that has already been shared.
A well drafted NDA should work for all the parties that have to sign it. It will ensure that confidential information remains confidential whilst the parties are working together and after the relationship has ended, but it will also be proportional and treat parties equally. Badly drafted NDAs (or ones that favour one side to the detriment of the other) will slow down transactions and could result in you losing a deal without providing any additional protection to your company.
Law Simple has created this free, easy to use, template NDA agreement for you to use. If you need any additional support, you can contact us here.
What should I think about when I receive an NDA?
Not all NDAs are the same. There are a wide variety of provisions that can be snuck into an NDA and which can impose onerous compliance obligations on your company and/or expose you to financial liability. Some common things that you should look out for are:
Indemnities: An indemnity is a promise to pay in the event that a company suffers a loss. Some counterparties will seek to include uncapped indemnities in their NDAs. In the first instance, you should resist this as it is not market standard. However, if you are required to give an indemnity, it should be narrowly drafted and your liability should be capped.
Inaccurate or overly broad definitions of “confidential information”: The NDA will restrict what you can do with confidential information. An inaccurate or very wide definition of confidential information can make it impossible to keep track of what information is confidential and can cause compliance issues within your business.
Inaccurate or overly narrow definitions of the purpose for which the information can be used: Under an NDA you will be able to use the information for a permitted purpose (such as considering a partnership or an acquisition). Any use of the information outside of the permitted purpose will be a breach of the agreement. If the definition of purpose is inaccurate or too narrow, you could inadvertently breach the agreement despite trying to comply with it.
Who the information can be shared with: Depending on the information being shared, you may need to share the information with employees or certain third parties, such as financial advisers and consultants. The NDA should allow you to do this and should not impose unrealistic compliance requirements on you when you do share information.
How long the information must be kept confidential: The NDA will require the parties keep the information confidential for a period of time. The appropriate time period depends on the type of information shared but is typically between one and three years. Longer time periods can be used but should be justifiable. For example, revenue information is unlikely to be confidential or commercially sensitive after a company publishes its annual accounts.
A lot of the time companies do not have the time to pick through the nuances of an NDA. That is why Law Simple created its fixed-fee NDA review product. Our team of experts will review an NDA, provide commentary on any unusual or onerous clauses and confirm whether you can sign the agreement within 24 hours for a fixed-fee of between £50 - £100 (depending on the length of the NDA).
Addendum – Venture Capital Investors & NDAs
Despite everything that we have said above about the importance of NDAs, Founders that haven’t had a lot of exposure to the world of VC should bear in mind that (unless you are developing cutting edge biotechnology or something equally sensitive) VC funds will not enter into NDAs when you share your pitch deck with them. In fact (even if it is not to your face) you will be laughed at and thought of as not serious.
If you are in that position, don’t worry about it and if you do want ad hoc guidance on dealing with VCs then reach out to us here.
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