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Posted on Jan 11, 2013

Keeping Secrets: Negotiating Confidentiality Agreements

Keeping Secrets: Negotiating Confidentiality Agreements

An issue for many early-stage businesses, particularly those contemplating securing investor financing, is how to protect their sensitive information, including financial information, intellectual property and customer data. Commonly, this protection is sought by entering into a confidentiality, or non-disclosure, agreement with the other party (an NDA). Although NDAs are not necessarily appropriate in all circumstances, there are some general points to keep in mind when negotiating them.

1. Keep It Simple. NDAs can run from a few paragraphs to several pages long and may be one-sided or mutual. Moreover, an NDA with a consultant will look different from one with a venture capital firm. When sending out or negotiating an NDA, consider the counterparty and save time and effort by keeping the agreement simple but well-tailored to the information being protected and the counterparty that is receiving it.

2. Why is the Information Being Provided. Keep the description for the reason confidential information is being provided broad but accurate to protect all disclosures that might be made now and in the foreseeable future. Also consider whether confidential information was inadvertently provided prior to entering into the agreement and if the answer is yes, make sure that information is also covered.

3. Not Talking About Talking. Make sure that the non-disclosure obligation runs not only to documents, information and data but to the fact that the parties are talking. Disclosing the mere fact that parties are talking can often have serious detrimental effects on the company, including angering other potential counterparties and unnerving the company’s employees.

4. Who is Responsible? Often the information being provided is shared with the recipient’s employees advisors and other agents. These other parties will not sign the NDA so make sure that the signatory is responsible for breaches by anyone with whom it has shared the information. This is of particular importance as the consequences of a breach can often be devastating and beyond monetary compensation.

5. How Long. Just because a relationship or transaction has terminated does not mean that confidential information should now be free to be shouted from the rooftops. Confidentiality obligations should generally continue for at least one year after the relationship terminates.

6. It’s Mine. Make clear that the information being shared belongs to the company and is not to be used for any purpose other than the one clearly outlined in the NDA. Similarly, it is important to ensure that any confidential information provided is returned at the end of the relationship or, at a minimum, that the recipient certifies that it has destroyed such information.

7. No Obligations. The NDA should not in any way obligate the company to provide any information (sensitive or otherwise) or to enter into any transaction with the receiving party.

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