Innovation is the driving force behind a startup. Startups become multibillion-dollar corporations when they successfully implement their novel idea. The start-up’s new product ideas, new ways of doing things and appealing designs are all part of its intellectual property (IP). However, these businesses often find it difficult to figure out how to protect their intellectual property while growing their company.
A non-disclosure agreement, commonly known as NDA, is one of the ways a startup can secure its information, ideas and business.
In this article, we will understand what NDAs are, how to draft enforceable NDAs using the NDA checklist and whether to propose an NDA for investors. Don’t let legal issues keep you from growing your business. For any NDA-related questions, contact our specialists at CoffeeMug. You can also go through a series of articles available at this platform to gain comprehensive knowledge of the startups ecosystem.
Non-disclosure agreement in India for startups
What exactly is an NDA?
Companies must keep their active projects, innovative ideas and new technologies confidential to maintain a competitive advantage. Similarly, startup firms in India with a unique and profitable concept can only succeed if they keep their plans secret.
A non-disclosure agreement, or NDA for startups, is a legal contract that keeps such confidential information under wraps. Within a broader legal document, these agreements are sometimes referred to as confidentiality agreements (CA), confidentiality statements or confidentiality clauses.
Only specific types of information are protected by NDAs. For instance, if you pitch your ideas at a networking event, they are not confidential. These ideas will not be included in the NDA. What you can safeguard are your company secrets such as technically complex processes, business plans, lines of code etc.
When to sign an NDA?
There are several events or conditions that necessitate the signing of an NDA for startups. Here are a few of them:
- Entering into a business deal
- While seeking expert advice on a new product
- When starting a new project
- When investigating a potential investment with another party
- Dealing with sensitive client information
- Discussing commercially sensitive information with another party
Who should sign an NDA?
- Cofounders: Individuals with the most access to the company’s intellectual property should sign NDAs in case they quit or try to start a competing business.
- Employees: NDAs are required by some companies, while others do not. In terms of firm ethics and privacy, your regular employment agreement may cover similar grounds. If you have staff who have access to classified data, you should have them sign an NDA.
- Partners: If your firm outsources parts of its process to outside suppliers or is working closely with another company on a shared endeavor, it is a good idea to have them sign an NDA to ensure that sensitive information is not misused.
- Independent contractors: Since independent contractors may come into contact with confidential material, startups should have them sign an NDA.
- Prospective C suite roles: If the candidate has knowledge of proprietary internal procedures, sign an NDA while interviewing for higher-level roles like CEO or CFO.
When an NDA is not required?
While NDAs are an important tool, employing them too frequently or widely may make the entrepreneur appear unprofessional and inexperienced.
- Public information: NDAs should only be used to protect sensitive information. As a result, establishing confidentiality for information that has already been publicly disclosed is inappropriate.
- Investors: Investors and VCs rarely sign NDAs when reviewing pitch decks. Negotiating confidentiality would be unrealistic and time-consuming for them because they are usually looking at a variety of possibilities in comparable situations. As a result, insisting on an NDA for investors during fundraising events can make you appear amateurish and may even result in the deal being terminated.
You can however, plan an NDA for investors when they become more actively involved in your business, such as becoming official advisors or becoming board members.
Major elements of an NDA checklist
When drafting a non-disclosure agreement, an NDA checklist provides an outline of issues to consider. It gives an easy way to ensure that no critical issues are neglected.
- Which NDA should you use?
Consider who is giving whom information. A bilateral (mutual) nondisclosure agreement is appropriate if both parties are supplying information to the other. Consider a unilateral agreement when information is provided in one direction only.
- Is “confidential information” defined?
The contract must specify what information must be protected or kept private.
- Is there a clearly defined period during which information is kept confidential in the agreement?
The contract should state the start and end dates as well as the duration of the contract. It may include terms stating whether or not the contract’s disclosure standards and obligations will continue to apply after the contract expires.
- Is it possible to terminate the confidentiality agreement?
The contract must specify if it is possible to terminate the agreement at any point? If this is the case, it should be stated whether the termination will affect only the right to receive and use sensitive information or whether the confidentiality requirements will be affected.
- Is our legal responsibility limited?
Are warranties, disclaimers and liability limitations discussed? Are indirect losses not covered?
- The NDA is governed by which law?
When the business is global and both parties entering into the NDA are from different countries, the NDA must specify which law rules the agreement.
It should also specify which courts the NDA can be enforced in the event of a disagreement. Because you may desire to enforce the NDA in a different nation if a disclosure beyond the scope of the NDA is made in that country, the courts of one country should not have exclusive jurisdiction.
The Bottom Line
The purpose of nondisclosure agreements is to prevent sensitive and confidential information from being disclosed to third parties. In order to protect their good ideas against being stolen by people they are negotiating with; companies and startups use these documents. In the event of a breach of an NDA, the violator is subject to lawsuits and penalties corresponding to the value of the lost profits.
CoffeeMug collaborates with startups, business owners and innovators to help them focus on their goals by aiding them with anything from business incorporation to investment advisory services and more. So, if you want to gain more insights on how to draft an NDA, we are here to help. Connect with us today!
Q. Why is it that the release of confidential information is restricted?
A. The individual that discloses private information to the other person may not want such information made public or shared with competitors because it could jeopardise future planning or market success. As a result, there should be disclosure restrictions in the near future to avoid future conflicts between parties.
Q. Is it necessary to have the NDA notarized?
A. It is not necessary to notarize or have a witness sign the NDA. However, to ensure the NDA’s continued legality and enforcement, parties may choose to have witnesses sign the NDA and enact the document’s legitimacy so that it cannot be challenged in a court of law.
Q. What options do you have if the other party violates the conditions of the NDA?
A. If a party to an NDA violates the confidentiality obligations, the aggrieved party may pursue legal action and seek damages.
Q. What exactly is arbitration?
A. Arbitration is a method of alternative disagreement resolution in which a dispute is handled in a friendly and peaceful manner through the elected arbitrator(s), with the arbitrator(s)’ decision being made judicially and having binding effect on all parties.
Q. What if one of the parties wishes to add more terms to the NDA?
A. If one party wishes to add an extra clause, it must first obtain the consent of the other party.