Non-disclosure agreements: if you’ve ever worked on a product in the development phase with someone else before, chances are you’re familiar with them.

Essentially, non-disclosure agreements are designed to prevent someone else from leaking your idea. But how do you know when to implement one? How do you approach the subject with a partner without seeming like you don’t trust them?

What is a non-disclosure agreement?

First, let’s go over what a non-disclosure agreement is and what it covers.

Also called confidentiality agreements, non-disclosure agreements (NDAs) are legally binding contracts that keep the signer from disclosing specific, secret information. This information is specified in detail in the contract along with the terms of the confidentiality.

NDAs typically protect trade secrets. A trade secret refers to information that isn’t suitable for a patent, but is integral to a particular product or method – for example, Coke’s formula is a trade secret. Other examples of trade secrets are the New York Times’ methodology for its NYT Bestsellers List and the Krispy Kreme doughnut recipe.

NDAs can also cover other information too, however. Business concepts, selling methods, and marketing plans are also sometimes considered confidential information, and as such can be included in an NDA.

An NDA also includes a time frame for how long the information must be kept confidential, as well as consequences for divulging it.

When should you implement a non-disclosure agreement?

If you’ve just launched your first business, it can feel strange to ask your potential partner or employees to sign an NDA. You may worry that doing so makes it seem like you don’t trust them.

However, implementing NDAs has nothing to do with trust. Like any other contract, an NDA is a legally binding document designed to protect both parties. Since they can cover virtually any information that you want to keep secret, there are lots of situations in which an NDA might be appropriate.

For product designers, NDAs can be especially important. This is because in many situations, public disclosure of a new product or concept can void patent rights – so if you share your idea with someone who then speaks publicly about it, you could find yourself not only with plenty of new competitors, but also without any rights to the patent for your product.

Situations in which an NDA could be desirable include:

  • Pitching your product to an investor
  • Pitching your product to a potential licensee or buyer
  • Giving employees access to sensitive information for a job function
  • Doing business with other vendors, and sharing sensitive financial, conceptual, or other information

It’s important to note that venture capitalists typically will not sign NDAs, so if you’re pitching to a VC group it’s probably best to leave the NDA at home. This is because VCs are always looking at multiple deals at one time – they don’t want to prevent themselves from investing in one company because they signed an NDA for another company with a similar idea.

What goes into an NDA?

An NDA will identify both information that is protected, and information that isn’t protected. It’s important to be as specific as possible, to prevent any misunderstandings or accidental disclosures.

NDAs also require that the disclosing party (you) notify the receiving party (the person receiving the confidential information) in writing when any confidential information is being conveyed.

For written information, that could mean placing it in a folder marked “Confidential” or stamping it with the word before giving it to the other party.

If the exchange of confidential information is done in person, through talking, then the disclosing party has to provide written notice that confidential information was conveyed as soon as possible after the disclosure.

Finally, the agreement will also specify the length of time for which the information must remain confidential, and any consequences for breaking the confidentiality.

If you’re going to implement an NDA, make sure you use an experienced business attorney to help draft the agreement – you shouldn’t simply pick a form NDA off the internet. Doing that will likely leave out important points you want to cover. In addition, you can be almost certain that potential employees, investors, or partners won’t sign a form NDA because it’s too vague.

When building your product and business, you may find yourself needing an NDA. Before asking someone to sign, make sure that an NDA is appropriate in your case, and work with a lawyer to draft one specifically for you. The other option, of course, is to simply keep confidential information to yourself.

For more information on building a product-based business, read our ebook “Turn a Great Idea into a Thriving Business.”