Do I Need an NDA?

One of an entrepreneur’s greatest fears is having their idea stolen. The phrase “I’d tell you, but I’d have to kill you” was probably first uttered by an eager entrepreneur who thought their idea was worth a fortune. Some of us are even hesitant to tell our own mother about our idea until we have some sort of legal protection for the idea in place (or until we’ve made some money so she doesn’t tell us to get a real job).

This post focuses on the Non-Disclosure Agreement as the means for protecting your confidential information. We will discuss what confidential information is, when the NDA should be introduced in a business relationship, and the limits of what an NDA can do. Hopefully, we can help ease your mind about having your information stolen and help you understand a document that is commonly misunderstood and misused, but can be a lifesaver for protecting the value of your business.

What is an NDA?

A Non-Disclosure Agreement (NDA), also referred to as a Confidentiality Agreement, is a legally binding, written agreement which governs the transfer and use of Confidential Information between two parties. In other words, one or both parties have things they want to share with each other, but want to make sure the other party won’t share those things with anyone else or use it for their own gain; at least not without facing a lawsuit. NDAs are used in a variety of commercial settings including to ensure employees to do not use company property for their own gain, to determine whether a manufacturer can build a proprietary product, or to make sure the parties to a merger keep the details private.

What is Confidential Information?

It is not always easy to pin down exactly what information is or should be considered confidential. Often it depends on the nature of the business, and context in which it might be disclosed. A common misconception is that everything related to the business, including the basic idea, is or should be confidential. This misconception usually stems from two misunderstandings: The first is what constitutes Confidential Information. The second is how massive a challenge it is to take an idea and actually turn it into a business.

First, though the definition in an NDA is usually rather vague, Confidential Information is essentially information that would be valuable in the hands of a competitor. It has to have some commercial value, otherwise there would be no reason for legal protection (when suing to enforce an NDA, you have to show that due to a breach of the agreement, someone made money (or very likely will make money) that otherwise would have gone to you).

Let’s use an example to tease out an understanding of what Confidential Information is. Suppose you have come up with a material that serves the same function as plastic water bottles but has a lower production cost and is 50x more biodegradable than the leading biodegradable plastic. The fact that you have come up with this material and started a business producing it is not confidential information. Neither are the basic facts that you have a supplier, a few large orders from customers, investment money to build a production facility, and a website explaining the basics of your product. While all of this may be very exciting, and may spark tremendous interest, without more, no one can turn that information into money.

Alternatively, the raw materials and process for creating your product, the source of your raw materials, the price you pay for raw materials, your customer list, the details of your plan to expand, or the terms of a potential acquisition are all highly confidential. This information in the hands of a competitor has commercial value, meaning it could be used to make more money.

The second misunderstanding concerns just how difficult it is to get a business off the ground, or to extract value from an idea. If it were easy to take ideas and turn them into businesses, a company would be doing just that and paying people a small chunk of equity or cash for ideas. We often encounter someone who has an idea for an app and thinks they’ve struck gold. They don’t want to tell anyone for fear of having the idea stolen. Unfortunately, an idea for an app alone has almost no value. The value comes when you actually figure out how you are going to accomplish the idea and come up with a working model. For example, imagine an app that tracks furniture throughout its life so that potential secondary buyers can see how many owners have had it before they buy it used. The idea itself is almost entirely valueless. Think about the logistical challenges of tracking every piece of furniture and every customer. Think about the inevitable challenges of building the system and the app. Think about how much it will cost. It’s hard to know whether furniture companies will adopt the technology or whether there is demand for it in the used furniture market. All of these questions and more stand in the way of anyone who tries to pursue this idea. Until something exists that can make the business actually happen, there is nothing confidential to disclose.

However, what happens if someone were to pursue this furniture tracking idea and somehow gets to a point where the technology is developed (that is, they have a way to tag each piece of furniture, a way to keep track of furniture and owners in a database, a system that can execute the entire tracking process, and an app that is simple to use and provides all of the pertinent information to users) and ready to be shopped to manufacturers? At that point, the task of identifying confidential information becomes quite important. Assuming the person and the manufacturer get to the point in their relationship where a deal is desired by both parties, which information should be covered by an NDA? The answer is any information that would allow the manufacturer to re-create the product itself and cut the original developer out of the market. So, without a strong NDA in place, the original developer should not disclose who designed the component pieces and the overall system, how the tags works, who manufactures the tags, the underlying technology of the tracking system, how it integrates with the app, any other customers or potential partners, or anything else that might give the manufacturer something tangible to use in trying to recreate the product[1].

It can be scary to introduce people to your ideas and attempt to put the pieces in place to move your business forward. However, if you cannot explain your product without disclosing what you believe to be confidential information, you probably do not have a well-developed idea. Furthermore, if you ask people to sign an NDA before telling them anything about your business, you will not be taken seriously.   

Next in this series:  When to sign an NDA