NDA

As a patent attorney, I often talk to small businesses and startups who say something like: “What good is a patent against a large business? You have to pay to enforce them.” Then in the very next breath, they will mention that they are discussing their invention with someone, but it’s okay, because they have an NDA. You realize that you have to PAY to enforce an NDA, right? NDA stands for non-disclosure agreement and is also known as a confidentiality agreement. They are just a type of contract that is so commonly used that they are referred to by a three-letter acronym or TLA. NDAs are not self-enforcing. If someone breaches your NDA, you have to pay to sue the breaching party to enforce the NDA just like you would pay to enforce any contract, patent, trademark, copyright, or trade secret. NDAs have been in the news a lot lately because they are powerful tools for big businesses, politicians, and celebrities to silence people, such as former employees, because there is a mismatch in power. NDAs have become controversial because rich people and big businesses have more money to enforce the NDA than the former employees to complain about…

I talk all the time with investors who get annoyed when small businesses and startups try to get them to sign an NDA. Even asking potential investors to sign an NDA is an instant sign that you are a total newbie to fundraising. There is a reason for this. Most savvy investors will not sign a Non-Disclosure Agreement (NDA) or at least not early on. This is because an NDA is basically a hunting license for suing people. Does that sound harsh? "I allege that you disclosed my confidential information. Now pay your attorney a lot of money to prove you didn't!" The goal of a potential investor, especially an institutional investor, such as a venture capitalist, is to quickly determine if your business is worth investing in. It's a numbers game for them so they meet with lots of potential businesses. For them to sign everyone's NDA would expose them to massive and unnecessary risk, which defeats the whole purpose of them meeting with you in the first place. So how do you protect your intellectual property without an NDA? Do not tell them the recipe for your secret sauce! Imagine that you are opening a restaurant and you…

Not everyone will or should sign an NDA (Non-Disclosure Agreement). Here are some groups of people that probably will not sign your NDA. Potential Investors Most potential investors will NOT sign NDAs during early investment discussions because they have so many businesses to meet with per week that it exposes them to tremendous liability. Instead, they will generally ask you to keep the confidential parts a secret. Most potential investors will only sign an NDA when performing due diligence for large, post-seed round investments. Asking a potential investor to sign an NDA at the beginning of most discussions instantly marks you as an amateur. Click here to read more in my previous post: What do I do if potential investors won't sign an NDA? Patent Attorneys or IP Attorneys Most IP attorneys I have spoken with, and I am one of them, will not sign your NDA or will do so at great reluctance. There is a reason for this. Our engagement letters are already superpowered NDAs. To put it mildly, our engagement letters have confidentiality provisions that are required by law and legal practice to go far beyond the confidentiality provisions of most NDAs. More importantly for us and…

Of course, all employees, collaborators, and contractors should sign NDAs. That is standard practice. But these are a few people you might not have thought of: Manufacturers, Engineering Consultants, and Testing Facilities Are you freaking kidding me? I cannot tell you how many entrepreneurs will get or try to get their mother, their patent attorney, and every venture capitalist (VC) they meet to sign their NDA – and then they do not require the person helping them manufacture their invention to sign the NDA. Your soccer mom, patent attorneys, and VCs usually do not have the equipment, contacts or desire to steal your idea and start competing against you. A contract manufacturer or engineering firm usually has ALL of the equipment and contacts necessary to make your product. That was the whole point of contacting them in the first place. Do not be fooled by the “free consultation.” Without a contract in place, they can easily steal your invention and start competing against you. Co-Founders, Partners, Co-Owners Most entrepreneurs require their employees to sign an NDA. But they do not think to have their co-founder, partner, or co-owner sign an NDA. The reasons for this range from “we’re such good…

As a patent attorney, I talk with inventors and entrepreneurs all the time. They will often mention that they have an NDA (non-disclosure agreement) that protects their innovation. Then when I ask where the manufacturer, marketing guru, or code writer is located, they will say anything from a different state to a country on the other side of the planet. NDAs are contracts, and like any contract you have to sue to enforce them. Can you afford to sue a contractor located in another state? Can you afford to sue a computer programmer based out of, say, Mumbai, India? My guess is “no,” and they know it even if you don’t. I suggest that you still want to have an NDA in place because it gives you options. But I would not rely on it. Instead, I suggest that you focus on the reputation of the business and their referrals and references. You know how you’re supposed to look before you leap. Well, research before you sign contracts or checks. If you are going to have a company in India or China write your code or make your products, you want one of the highly reputable ones that is making…