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To Sign or Not To Sign?

When it comes to the paradoxical nature of the nondisclosure agreement (NDA), there are no easy answers but a lot of questions — the main one as basic as "Do you or don't you use an NDA?"

An NDA is a contract whereby the signer agrees not to disclose certain information, except under specified terms. It is used when inventors have otherwise unprotected ideas that they want to reveal to a third party (e.g., potential investors, strategic partners, or subcontractors) but do not want the information to be disclosed to other parties. The information must be used solely to serve the aims stated in the agreement.

An NDA usually includes a non-compete clause to "prevent" the third party from using the information to compete by producing or selling the idea.

Note: This article is intended to provide a general picture of the subject. For specific advice pertaining to nondisclosure agreements and your business, consult your legal advisor.

According to lawyer Naor Daniel, who has worked extensively with both entrepreneurs and investment groups, it's not always a good idea to protect your good idea with an NDA. "The potential pitfalls are enormous and it's virtually impossible to defend," says Daniel. 'What in theory is a straightforward agreement of confidentiality between parties can become such a complicated "minefield" as to render it irrelevant, because the receiving party won't sign," he explains.

So, What's the Problem?

Simply put, some investors are simply not prepared to sign an NDA. Not only could requesting an NDA have a negative effect; it might be construed as "a downright insult, on the premise that if you can't trust them, they're not interested," warns Daniel.

Others might sign if there is an agreed compensation clause (Hebrew: pitzui muscam). However, even if they are prepared in theory to sign NDAs when convinced of the overall benefit, in practice an agreement that is overly complex and draconian might turn them off. And no one will sign a document that demands upfront damages if there is an information leak.

Pointing out the paradox, Daniel reiterates, "If you want to make your NDA effectively enforceable, no-one will sign it." Horror stories abound of 50-page contracts that either ended up lining hamster cages or doubled in size once the recipient's lawyers added their provisos, disclaimers, and other addenda.

A Contract Is Only as Good as the Person Signing It"

So goes the ancient saying. Daniel concurs: "A nondisclosure agreement is as good as the word of the person with whom you share the information." To prevent some of the potential hazards, he recommends this four-step protection plan:

Use the business grapevine to make some discreet inquiries as to the trustworthiness of the people you are meeting. Check that the investment group is not nurturing a rival company — and that the potential strategic partner does not have a history of setting up parallel production lines.
Keep the agreement brief, clear, simple, and polite — not a convoluted and heavy-handed fax machine choker.
Disclose one piece of information at a time. "Keep your core technology a secret and only provide information that is relevant to the investor," cautions Daniel. "Operate on a need-to-know basis by disclosing general information in the first stages of negotiations and then progressing to more details as required."
Disclose to as few people as is feasible. The value of an NDA is reduced proportionately to the higher number of signers as there is less chance of identifying leaks.

Daniel suggests that an NDA is best used if the technology/application cannot be patented, or as a security blanket if you are going the patent route. Investors often bring in a specialist in the relevant field to provide an opinion on the technology, based on their knowledge of the "big picture and not of the specific technology or application," notes Daniel. "Then the consultant will agree to only disclose the information to the investor that he or she needs to make a decision," he explains.

The Alternatives

You have several options to protect your idea if an NDA is out of the question: one is legal; the other depends on the kindness of strangers and colleagues:

		Patents. Taking out a provisional patent application will protect your idea for a year, but there are problems even here. See the Trendlines article "Provisionally Patenting" for more information on this important issue.
		Due diligence. If your idea cannot be patented, you have to operate on trust — not easy in today's super-competitive world. Do due diligence before going ahead. The Web resource ABC's of Small Business recommends the following: "If you are proposing to talk with a person or company that you don't know very well, ask to talk to other people they've worked with in confidential situations before you tell them about your idea."

Promises, Promises

"A verbal contract isn't worth the paper it's written on," according to the late movie mogul Samuel Goldwyn. But in the inventor-investor scenario, a verbal contract could be worth a lot more than the paper the NDA is written on. You need to remember that the contract is indefensible if signed by more than one person. With a verbal agreement replacing a legal document (the NDA), you simply have to trust the word of the disclosee that he or she won't wait till you've left the office, then call the competition and pass on the secret formula.

Upping The Credibility Ratings

So is an NDA an indication of serious intent? Will potential investors or strategic partners take you more seriously if you request they sign an NDA before meeting? Will they be impressed? Or will they be deterred? Says Daniel, "It entirely depends on the attitude of the investors. Some will not meet you without prior signing [of the NDA]; others will not even let you in the door if you request it."

The Bottom Line

In spite of all the drawbacks, your safest bet might be still be an NDA. Just be aware that it won't necessarily provide you with protection or compensation — the very reasons for employing an NDA in the first place. If you decide that you are going ahead with an NDA, that it's your best protection under the circumstances, remember to (1) keep the agreement short and respectful, (2) disclose one piece of information at a time, and (3) disclose to as few people as possible.

And yes, NDA is also the acronym for new drug application — but that's a different story.