Have you already decided to start a startup or join a startup?

You might be aware of contracts that are known as “confidentiality agreements or “non-disclosure agreements”.

These contracts might not be very common when the startup is only composed of the founding team (1-2 founders), but as you grow (either through outsourcing or not) you’ll want to be familiar with these kind of contract.

Let’s start with the beginning.

What’s a non-disclosure agreement

A non-disclosure agreement (shorten as NDA most of the times) is a legal contract that’s created for a single purpose: protecting confidential information. It’s also known as a “confidentiality agreement”.

Confidential information can be anything that your startup develops: software source code, algorithms, diagrams, and so on.

If what you’re working on is proprietary and unique, it can be defined as confidential information in your NDA agreement.

There are two main types of a NDA agreement:

  • Unilateral NDA. When just one party discloses confidential information, the agreement is a unilateral agreement.
  • Mutual NDA. If all parties will disclose confidential information, the agreement is then a mutual agreement.

In the startup world, especially at seed level, a NDA agreement is not very common. It’s also not really needed: it’s just you and your co-founders working hard to get started with your startup.

However, as your startup grows, you’ll focus your efforts on multiple battlefields at the same time: convincing new talent to join, business development with potential partners, reaching out to journalists, testing marketing channels, and so on.

When to use a non-disclosure agreement

Let’s find out when you should use a NDA at your startup and when not.

It has become especially useful to have this kind of legal contract when you find yourself in these situations:

During advanced business discussions.

Initial business talks don’t generally focus on going through all the details of what your startup does, developers and so on.
If your startup develops an unique proprietary algorithm it makes sense to protect it using a NDA agreement to force the other party to not disclose how the algorithm really works.

When hiring freelancers.

Many startups have relied on freelancers and it’s important to pay attention what the freelancer is given access to.

If the core IP of your startup is confidential and the freelancer needs access to it, a confidentiality agreement that binds the freelancer to confidentiality obligations can help you keep the inner-workings of your startup a secret.

During licensing discussions.

Certain startups find that licensing their technology will boost their revenue.

Not all startups have the capability to license their technologies. This depends on the business, business industry and other factors, but those that do get tap into a potential profitable revenue stream.

Your business development efforts will lead to discussions where you might need to disclose important information about your startups. This can include customer lists, business plans, marketing plans, and so on.

A legal contract, in this case a mutual NDA agreement, can protect the information you need to share and give you peace of mind that the information won’t be released in public.

NDA agreements at VC meetings

NDA agreements are viewed negatively by most VC if the agreement is asked to be signed before even discussion what the startup that’s seeking VC is all about.

This means that you shouldn’t bring a NDA agreement at your first VC meeting. In fact, if your startup doesn’t have anything that’s highly confidential then you don’t need a NDA agreement at all.

Actually, there’s more than one single reason why most VC would refuse to sign this contract with new startups.

The first reason is that most VC simply do not have the time to read, sign and maintain NDA for each pitch they are attending. It’s simply not practical to do so as VC firms can attend and hear hundreds of pitches in a single year.

The second reason is that a NDA agreement can break their “deal flow”. In the most basic terms, the “deal flow” is the VC’s ability to receive and consider ideas and deals they can invest in.

If your NDA agreement somehow limits their ability to consider another company that’s similar to yours, now or in the future, then the VC won’t sign the agreement.

As a startup founder, you shouldn’t worry. VC are not company builders, but would rather see you operating your startup and them helping you grow it.

This article was contributed by Max Johnson. Max focuses on providing helpful content for small business owners and entrepreneurs on everything that there is to know about non-disclosure and confidentiality agreements.

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