When you have an idea for a product or start-up ready for execution, but you do not feel like you want to start a business on your own or you simply do not have the necessary funds to do so, you might be looking for co-founders or investors. When doing so, you do not want someone else to learn of your idea and then take it and use it themselves. Therefore, it is important to keep the circle of people you tell about your projects small in the beginning. It is also important to protect the information that you share. In this context, a non-disclosure agreement ("NDA") often comes into play.
Many entrepreneurs decide to draft confidentiality agreements on their own, hoping to save legal fees and use limited resources in other ways. Unfortunately, this leads to some common pitfalls. To help you avoid these pitfalls, we have explained in this blog post what an NDA is, what the most common pitfalls are when drafting an NDA, what you need to include in an NDA.
What Is An NDA?
An NDA is a legally binding contract that establishes confidentiality between the parties to the agreement. An NDA can be written in a way that only one party is subject to the confidentiality obligation or that it subjects all parties to the obligation of confidentiality. Moreover, an NDA can stipulate that confidential information may only be used for a specific purpose. This is important as it will help you make sure that your potential business partner to whom you are disclosing the information is not going to use the confidential information for his/her benefit or to gain a competitive advantage.
Pitfalls You Should Be Aware of to Take the Necessary Steps to Avoid Them
When drafting a contract, there are quite a few pitfalls that must be avoided to ensure successful execution.
1. Make Sure Your Investor or Business Partner Is Ready to Sign an NDA
Often it is the case that you will have to disclose some information about your idea and how you plan to execute it before an investor or business partner is willing to support you. So, make sure that you have an elevator pitch ready that ensures that your potential new investor or business partner gets hooked without disclosing the core of your idea or how it will be executed.
2. Lack of Specificity
Many entrepreneurs use templates they find online to draft their first NDAs; however, the most important part of any NDA is the details about what information is covered and must not be revealed. As a rule, a blanket prohibition covering all information that has been disclosed often results in agreements that will not be signed by investors and more importantly will be difficult to enforce. Therefore, it is important to be precise about the information that you want to be covered. Items such as trade secrets, inventions, improvements to existing products or processes, your plans for expansion, information about finances or anything related to your business strategy. As a rule of thumb, it helps to think about what information may harm your business if it is disclosed and then clearly describe such information.
On a side note, do not forget to include exceptions to your definition of confidential information such as information that is already public knowledge, has been received by a third party or that has been developed by your counterparty individually. This helps to make sure that your counterparty or a court does not interpret the lack of exceptions as a gap in your NDA and fills it by way of interpretation.
3. Lack of an Enforcement Procedure
In Switzerland, liability for a breach of contract usually requires damage, which can hardly ever be proven as a result of the disclosure of confidential information. Hence, it is not enough to have a confidentiality obligation in your agreement, but you must also include what happens if a party breaches the agreement. For example, you can provide for a penalty payment for any breach. However, make sure that the penalty is a reasonable amount, so that it cannot be challenged in court later due to it being an excessive amount.
4. Making Sure the Person Who Signs the Agreement Has Signatory Power
The person signing the agreement must have signatory power to execute a binding agreement as the agreement may be invalidated otherwise, which would render it rather difficult to enforce such an agreement.
In Switzerland, you can check if a person has signatory power by having a look at the commercial register at www.zefix.ch.
What Do You Need to Include in an NDA?
Go through our checklist below to see whether your NDA covers the key aspects of such agreements!
- Correctly identify the parties to your NDA.
- Definition of what is considered confidential - be specific about this!
- The scope of the confidentiality obligation, including any limitations (e.g. what happens if a party is legally compelled to disclose the confidential information).
- The term of the agreement and the duration of the confidentiality obligation.
Note: A contract cannot exist forever; however, the confidentiality obligation may last for a longer time than the actual contract itself, and may continue as long as the information is confidential.
- If the confidential information must be returned and at what point this must happen.
- The remedies in case of a breach including pecuniary penalties.
- The jurisdiction and governing law.
- The NDA needs to be signed by persons with the authorisation to sign an agreement on behalf of the parties.
If you are unsure about using an NDA or how to draft such a document, please reach out to us. We would be happy to discuss this with you. Also, check out our other blogs addressed to entrepreneurs or join us for one of our start-up events. To stay up to date on what is going on in the start-up world, you can subscribe to our blog or register via the button below.
Photocredit: pexels / Joseph Redfield