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Why NDAs are important when dealing with other parties

January 16 2018

What does this mean?

If you’re sharing confidential information, you need to have make the receiver sign an NDA before sharing it. We cover everything about NDAs here, but it’s important to understand the distinction between confidential and not confidential.

Chances are your idea is not confidential. But if you have a business plan or process on how to execute your idea, that could be confidential.

And if you share confidential information (think: a customer list) with someone without getting their consent to keep it confidential, then you just lost all the value of what you shared.

In other words, if you shared that customer list with a possible buyer without an NDA, it’s no longer a trade secret, which makes it worth nothing.

Does it apply to me?

If you have confidential information and you’re sharing it, yes. If you don’t have confidential information or you’re not sharing it with anyone, then no.

Note: The sexy thing to say here is, “You just have an idea, and any investor or prospective buyer would balk if you told them they had to sign an NDA before you shared it with them. You’d get laughed out of the room!”

But - that’s only half true. If your information is part of your pitch that you’re doing to everyone, then of course that’s not confidential. But if your information is something actually valuable that a competitor could do something with, then NDAs make a lot more sense.

Why is making this mistake going to destroy my business?

The biggest reason is that you’ll lose all the value that the confidential information might’ve had. Unless your information is patented, odds are its protections and value stem from it being a trade secret. To be a trade secret, you have to (1) have information that’s actually confidential and worth something and (2) take steps to keep it confidential. If you share the information with even one person, that by itself could cause you to lose all the value that information had.

You could avoid all this by:

Making anyone who you’re sharing the information with sign an NDA. Download our NDA template which you can tailor to your specific needs, if you don’t already have one.

For more info you can check out our blog on the effects of failure to protect confidential info.


Example:

Will hired a contractor to manage his social media accounts for his online business. They didn’t sign any contracts, and the contractor had access to Will’s company’s Google Drive, which contained all their contact information.

The contractor disappeared and Will found out months later that the contractor got an offer to work with a competitor who created a similar product as Will’s. Will knew that the contractor had stolen all Will’s confidential information, including his customer list, because he saw the similarities in the products and he found out that the competitor was stealing Will’s customers.

Will would have little recourse here because the “confidential information” wasn’t confidential if it was shared with someone who didn’t sign an NDA. This means that the confidential information wouldn't be a trade secret because to be a trade secret, one of the requirements is that your information is “confidential.” So technically the contractor wasn’t stealing anything.

Chris Daming, J.D., LL.M.

Written by Chris Daming, J.D., LL.M.

Chris is the founder and CEO of LegalGPS. Previously, he served in the Army (82nd Airborne), then went to law school and got his J.D. and LL.M. He practiced law and ran the Startup Legal law firm before founding LegalGPS.

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