The Non Disclosure Agreement (NDA)
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Definition of NDA
A non-disclosure agreement (NDA) or a confidential disclosure agreement (CDA) is a legal contract that protects entrepreneurs against the theft of their intellectual property since sensitive information may be disclosed over the course of a meeting or presentation with potential investors. This extensively written document shields an outsider’s access to non-public business information and entails every imaginable form of confidential information concerning an entrepreneur’s discovery or invention.

The importance of confidentiality
It is critical for the entrepreneur/inventor to consider confidentiality when approaching potential investors or individuals for assistance in developing ideas. This is not to suggest that all duties of confidence cannot occur in the absence of such a contract; however, an NDA should be implemented for the protection of the entrepreneur. If vital company information is disclosed without the security of this contract, the information obtained can be given to anyone outside of the company, including competitors. In addition, a public disclosure of secret/sensitive company information can prevent the filing of a patent application for that particular invention/discovery as well as claiming trade secret protection. This will leave the inventor with no rights unless the disclosure was made “in confidence.”

The wrong time to present an NDA
Often times, entrepreneurs request investors to sign an NDA far too early in the investment process, usually during their first meeting before a business plan is presented or even before they reveal their company name. Most angel investors are hesitant about signing one so early because a large number of entrepreneurs approach them each year with similar ideas. Angels do not want to take the risk of inadvertent disclosure where they can open themselves up to potential litigation. Early signing of NDA’s will also limit the amount and type of deals in their portfolios. On the other hand, some angels, who look at only a few deals each year, may be willing to sign an NDA earlier in the process; however, entrepreneurs should approach each investor encounter the same way and not depend on relying solely on these types of investors to sign their deal.

Entrepreneurs are encouraged not to present an NDA in the first meeting with their investors. Instead, their initial presentation and business plan should be tailored to exclude actual intellectual property or confidential information, but reveal enough to entice prospective investors into further evaluation of the company. Many angels firmly believe that entrepreneurs should be able to convey their ideas and opinions without giving away secret facts. Furthermore, business owners should be aware that disclosing too much information will not advance a business deal nor will it successfully gauge interest in probable investors.

A bad sign
Some companies are distressed about their ideas being stolen and become overly sensitive and extremely protective about sharing such information. Since these business owners have become so preoccupied with this fear, they actually commit more harm than good for their company. The immense fear that their ideas will be stolen hinders the development of their business because they fail to promote their products and services, and as a result, the company ends up not selling anything and even ends up losing money. When business owners become too secretive with their angel investors, it is considered to be a bad sign.

The right time to present a NDA
Only in exceptional circumstances or during the due diligence process will angels consider signing an NDA. Any period before the due diligence process is considered premature. Any patents that are pending and disclosures with attorneys will also be exposed during the due diligence process.

The importance of an attorney
An entrepreneur should seek the assistance of an attorney who can prepare this document for them. It may be challenging to create a non-disclosure agreement that complies with the entrepreneur’s need for protection while not being overly secretive to investors. In addition, if the NDA prepared is too complex to understand, then the investor is encouraged to have their attorney review and explain it to them before they sign the agreement.

Points to consider when using an NDA
First, it is highly recommended that an entrepreneur/inventor consult with a patent agent about the protection of their ideas and the risks of communicating these ideas to an outside party (people or groups outside of the company). Second, the NDA should serve both the entrepreneur and investor(s) interest(s). It should be read carefully and legal advice should be pursued for proper understanding of the agreement. Lastly, both parties should be aware that there exists no set formula for an NDA. For the entrepreneur and investor, each agreement may be presented differently with every new investment endeavor since each applies to different circumstances.

Business owners should always make sure to protect their intellectual property, including all proprietary and confidential company information. They should not disclose any restricted information to outside sources without the provision of a non-disclosure agreement for all involved participants, including their potential investors. A partnership requires a high degree of mutual trust, and an entrepreneur can protect himself/herself from such issues by having an NDA prepared by their attorney during the due diligence process.

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