Non-Disclosure Agreements: Is there a practical guide for what one should look for when signing someone else's NDA?

As you can see from the many answers already provided, this is a pretty prevalent problem in the startup world especially when a startup is dealing with a much larger, more established company. The larger company will want you to sign their NDA or they will not do business with you and obviously they have more bargaining power at this point because that is just the nature of things.

So, what can you do? Well, you really do need to understand anything that you are signing and committing your company to. I don’t think simply skimming and signing will be your best strategy going forward. You should read the NDA or at least have one of your employees read the NDA so that you have a basic understanding of the provisions that you will be subject to.

A practical guide. The answers below give you some good ideas about specific things that you should be looking out for but in general, you should look for things that stand out as unfair. Again, you really can’t do this without understanding what is contained in the NDA and you can’t understand what is contained in the NDA by simply skimming and signing it. You need to read it.

An example of something that would be unfair in an NDA would be, as mentioned by Justin Liu, a lack of mutuality, or basically an NDA that is too one-sided. If an NDA is asking you to do significantly more than you are asking the other company to do, there would be a lack of mutuality. Generally, you don’t want to subject yourself to any one-sided provisions.

Another example of something that would be unfair could be a harsh punishment in the event of a breach. To understand this you first need to understand what would actually be a breach under the agreement and also what would happen in the event of a breach. Then, basically evaluate if the punishment fits the crime. If a small breach could subject you to disproportionate liability, that is unfair.

In sum, you really should be reading the NDAs that you sign and commit your company to. If you have questions or are unsure about the meaning of some provisions, you should visit LawTrades. Our legal platform makes it easy to connect w/ an experienced attorney for a price that meets your budget. Good luck!

4 Replies to “Non-Disclosure Agreements: Is there a practical guide for what one should look for when signing someone else's NDA?”

  1. Having been there a lot, the pragmatic (if defeatist)  answer is that what can you do? If you are a startup, they won't sign yours, and even if you do want to pay a lawyer for edits, they still won't change their corporate standard NDA.

    So you either sign, grimace & sign, or decide you don't really want to work with them anyway…

    The three areas you might look at:

    As Justin Liu says Mutuality is important.
    This is usually any easy one. BigCo will have Mutual NDA or Reciprocal NDA standard form. They may not offer it, and try to offer a one-way version, but you should insist on the mutual one: you want to protect your ideas, and you accept they want to protect theirs.
    If they refuse to sign a mutual NDA they are probably not people you want to deal with anyway.

    Jurisdiction is another one. We are OK with New York, California or English law. If someone wanted an NDA under Louisiana or Italian law I think I'd be suspicious.

    Check to see if there are any 'after the fact' restrictions. Obviously, the point of an NDA is to protect someone's ideas but I have seen some that tried to restrict people who had seen the information from having new ideas in case they were influenced by the information. As far as I could tell, the only way to protect ourselves was to either kill or lobotimize anyone who had met them, just in case they ever had an idea…

  2. The purpose of a non-disclosure agreement (NDA) is to keep confidential information secret and prevent its misuse.

    Depending on whether you are the disclosing party or the receiving party of confidential information, you will need to look out for different types of clauses.

    Nevertheless, there are some general clauses that you should keep an eye out, whether you are the discloser or receiver of confidential information:

    Definition of confidential information

    Be aware of any definition that is overly extensive if you are the receiving party of confidential information as this places more limitations on you.

    If you are the disclosing party, you want to make sure that the definition covers any foreseen and unforeseen disclosures you may make.

    Here are two examples of definitions of confidential information.

    From the Docracy website:

    From the website IPWatchdog.com:

    Mutual vs unilateral obligations

    Are you expecting mutual obligations of confidentiality from the other party, i.e. if your NDA a mutual NDA agreement?

    Are you intending to disclose confidential information as well?If so, the obligations of confidentiality under the NDA should apply equally to both parties.

    Residuals clause

    The residuals clause generally is drafted to allow the receiving party of confidential to use information that is retained by memory or to continue development of its own competing ideas, products, services etc. This obviously benefits the receiving party of confidential information so if you are the disclosing party, beware.

    Here are two examples of residuals clauses.

    From Microsoft’s Confidentiality agreement for Licensing Discussions:

    From the Harvard Business School website:

    Special procedures

    Some parties like to include special procedures for confidential information to separate these from ordinary information.Special procedures can be extremely helpful or extremely burdensome.

    Common special procedures include the marking of confidential information as such, or the need to provide written confirmation to declare which information is confidential.

    Duration

    The duration of the NDA agreement determines the length of the obligation of confidentiality.

    The obligation may end when the agreement ends, or it may continue for a defined period even after the agreement ends. Alternatively, the obligation for confidentiality may never end in a perpetual NDA.

    It’s important that you identify what applies and whether this suits your situation.

    Here is an example of a duration clause from Accuride Corp’s Confidentiality and Non-Disclosure Agreement:

    Non-competition

    If you are the disclosing party of confidential information, you need to be aware of the existing law in relation to non-competition clauses in your applicable jurisdiction.

    If you are the receiving party of confidential information, you need to be careful of any clauses that prevent you from obtaining or maintaining future employment in your industry or from working on similar projects.

    Here is an example of a non-competition clause taken from the Youra website.

    Treatment of confidential information after end of agreement

    Sometimes, it’s easy to forget about what needs to happen at the end of a contract.

    If you are disclosing confidential information, you need to think about what you want the other party to do with your information. The common clauses normally state that originals and copies of confidential information need to be returned or destroyed.

    As for an example of this clause, here is one from Accuride Corp’s Confidentiality and Non-Disclosure agreement again:

    Credits: The following icons are from The Noun Project: "Secure File" by Creative Stall, "contract" by Luis Prado, "Thinking" by Bastien Ho, "Document" by Ilsur Aptukov, "timeline" by Ashwin Dinesh, "Paper Shredder" by Bernar Novalyi.

  3. One thing that I look for when signing NDAs is mutuality. I think it's a good sign when the other party does not ask me to protect more information than they will protect of mine. This will not always be sufficient because of the nature of your exchange (e.g. if the transfer of data is only one way), but the lack of mutuality would raise some concern (e.g. they ask me to keep some type of information of theirs confidential without a corresponding agreement by them to keep my similar information confidential).

    This answer is obviously incomplete.

    Disclaimer: This post does not constitute legal advice and does not establish an attorney-client relationship.

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