If you are an entrepreneur, you’re familiar with Non-Disclosure Agreements (“NDAs”), sometimes also called “Confidentiality Agreements.” The purpose of an NDA is to protect company-owned proprietary information.
A candid question: Do you use NDAs? Why not? Because you and your business partners trust each other? You might want to rethink this.
NDAs Should Be Standard Practice
Companies should require employees and consultants to sign NDAs as part of becoming engaged as service providers with the company. The NDA, along with a service agreement (either a consulting or employment agreement that includes the terms of the engagement, sometimes called a “Service Agreement”) and an agreement that assigns to the company any work product created by the employee or consultant (often called an “IP Assignment”), should be standard documents for all hires.
Other business partners, potential acquisition candidates, and other third parties who have access to the company’s proprietary information should also sign NDAs before seeing any proprietary information.
Entrepreneurs can be reluctant to require employees, consultants and other third parties to sign an NDA. This can be a major mistake.
Let’s consider two situations, both loosely based on actual events.
A client in the software industry hired a CEO. The CEO worked for the company for several years. I had prepared a standard NDA, Service Agreement, and IP Assignment for all company personnel, including employees and consultants. Everyone was supposed to sign these documents as part of the onboarding process.
Problems with the CEO developed over time. The CEO’s conduct and performance became a real issue for the company. Finally, the company decided to terminate the CEO. The company sent a termination letter to the CEO. The CEO agreed to leave but wanted to negotiate for severance pay, and to keep his company laptop as part of his severance.
Management then discovered that the CEO had access on his company laptop to the online hub where the company’s software developers housed the company’s “crown jewel” software. I also discovered that for whatever reason, several individuals, including the CEO, had not signed an NDA, Service Agreement, or IP Assignment Agreement. The company was faced with the clear possibility that the newly fired CEO had the ability (if he had not done so already) to download the crown jewel software and sell it to third parties.
After some emotionally charged calls and frenzied remedial action, we were able to avert a crisis and protect the crown jewel software.
Had the CEO signed the NDA and other agreements at the time of hire, these problems could have been avoided.
A divorce attorney invited me to assist in a divorce she was handling. My role was to negotiate and document the sale of the wife’s interest in the family business to the husband. The family business was the single biggest marital asset. The wife had been integrally involved for years. As part of the divorce, she wanted out, and the husband wanted to buy the wife’s interest in the business.
The family business had a unique online tool the husband had developed to increase sales. During the divorce proceedings, it was discovered that the wife had tried to sell the business to one of the company’s biggest competitors, located in a neighboring state. She took at least one trip to the competitor’s headquarters. But somehow the sale never occurred.
During the divorce proceedings, the competitor offered the wife a senior level job in the out-of-state location, performing functions that were very similar to the ones she had performed for the family business. The competitor soon afterwards unveiled a new website with essentially the same online tool that had been unique for the family business.
I asked the husband if he and his wife had signed NDAs. He told me it had never occurred to him, because he trusted his wife and they were in the business together.
Attempts to get protection of the company proprietary information through divorce court were unsuccessful. The husband was granted the business. But the value of the business had been severely compromised because the online tool had been leaked to the competition.
An Ounce of Prevention.
In both these situations, and many others, the parties could have avoided major problems by signing NDAs early in the business relationship. No, an NDA won’t solve all the problems all the time. People can still leak confidential information. But it provides some legal protection and recourse for the company.
The discomfort of what can appear to be “technical lawyer stuff” and dealing with the comment, “Don’t you trust me?” is small in comparison with the trouble that can be avoided.
In the words of Michael Coroleone, “It’s not personal. It’s just business.”
David Peteler works with many entrepreneurial businesses in their start-up, financing, growth and exit stages. Contact David with questions on NDAs, Service Agreements or IP Assignments, and other entrepreneurial business questions.