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Of the many contracts that startups draft and execute, non-disclosure agreements (NDAs) are among the most common. Protecting intellectual property is a key concern, and thus, startups want to legally prevent employees, vendors and investors from disclosing information about the company to others — in particular, the competition.
Despite the importance of these agreements, many startups make errors that render NDAs unenforceable. Working with an attorney can help prevent some of these pitfalls, but as your company develops and manages NDAs, you should be aware of these common mistakes and take the necessary steps to avoid them.
Lack of specificity
The most important aspect of any NDA is that it specifically details which information is covered by the agreement and cannot be revealed. A blanket prohibition that prevents individuals from revealing any information about your relationship or your meetings would result in a confusing document, be onerous to enforce, and likely not hold up in court anyway. In other words, you cannot cover discussions about your weekend plans, the latest football game or how you plan to design your new office space and expect that to hold up in court.
You can, however, prevent individuals from talking about trade secrets, your plans for expansion, information about your finances or anything related to your business strategy that, should it be revealed, could have a detrimental effect on your business. Therefore, be specific in what you are covering with the NDA.
Lack of an enforcement procedure
It’s not enough to ask for confidentiality. You must have a procedure in place for enforcing the agreement. What happens if the receiving party violates the agreement? Does the case go right to litigation? Are there financial consequences? Clearly outlining the consequences of a breach of contract not only increases the likelihood that the receiving party will adhere to the contract, but it also helps your legal counsel act quickly if a breach occurs.
Not including exceptions
Courts are more likely to strike down a confidentiality agreement that they deem are difficult to adhere to, so including exceptions in the NDA will increase the chances that it will actually hold up in court. Exceptions might include information that is already public knowledge, information that was received by a third party and information that the signer developed him or herself.
Failing to define confidential information
“Confidential information” is often used as a catch-all term in NDAs, but without a clear definition of what constitutes confidential information, the agreement can be difficult to enforce. The contract must specify exactly what constitutes confidential information, and that information cannot be shared verbally or in writing.
However, don’t rely only on your NDA to protect your information. You must also develop strong internal policies to govern the information included in an NDA, as lax policies in-house (for example, letting employees take information home or make copies) can invalidate an agreement, as the court may decide that your confidentiality policies aren’t adequate.
Clerical errors can render any contract invalid, so it’s important to get all of the information correct. For example, if you are working with a company, you want to ensure that you use the proper company name on the agreement, not the individual signing the agreement or the DBA (“doing business as”) name only. Spelling errors, or failing to include “Ltd.” at the end of the company name or another oversight can also invalidate an NDA, so double-check that everything in the agreement is accurate.
Agreements that are signed by the wrong person
If an NDA is signed by someone who does not have the power to execute a binding agreement, it could potentially invalidate the agreement. This is common in organizations that follow organizational bylaws or operating agreements that designate specific individuals who have the power to sign an agreement, regardless of the content of those agreements.
If you are working with a representative of a company (i.e. a salesperson) and he or she signs the NDA but does not have the authority to do so on behalf of their employer, the NDA could be considered invalid, and you will have no recourse if confidential information is revealed.
Not properly maintaining copies of the NDA
NDAs, like any contracts, are living documents until they expire. Therefore, you must implement a contract lifecycle management system that ensures that NDAs aren’t “lost in the shuffle” or stored in a filing cabinet and forgotten about. A contract management system will allow you to stay on top of who has what information and what they can and cannot say, remind you of key milestones in the contract (such as expiration dates) and ensure that you remain on top of the contract throughout its life.
NDAs are a key aspect of protecting your startup against competition and maintaining your intellectual property. If you make these mistakes, though, they may not be worth the paper they are written on, so be sure that you take steps to write ironclad contracts and stay on top of them.