Non Disclosure Agreement: Why It’s Not Really About Protecting Secrets

Last Updated at: Oct 08, 2020

Entrepreneurs, particularly when they’re inexperienced, think too highly of legal documentation, in particular non-disclosure agreements (NDA). Perhaps it’s in the hope that they’re doing something that will change the world. Anyway, entrepreneurs we interact with often ask about them – including whether they should have venture capitalists they pitch to sign (and in case you’re wondering what the answer is, it’s a no in nearly every single case). Now, it’s not that NDAs are useless (of course, not); it’s just that you need to have fair expectations of its use.

Type of NDA (Non-Disclosure Agreement)

They Don’t Keep Secrets

An NDA can’t force the signing parties to keep each other’s secrets. How could a document do such a thing? It merely gives either party the right to take the other to court if their rights have been violated. But have you ever thought of how hard it is to prove such a thing? Just imagine a research organisation showcasing a new algorithm to a larger research organisation after the signing of an NDA. Let’s say two months later the larger organisation launches the new algorithm, claiming to have developed it on its own. Do you think the smaller organisation would take the larger one to court? Even if it did, do you think they would succeed in proving theft of data? It’s very hard to do in the real world. They will claim they dreamt it up themselves and you won’t be able to do anything about it.

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What it’s For

NDA is merely a deterrent. If the other party would rather not have a lawsuit on its hands, it simply won’t leak the data. If the other party thinks you’re large enough to make it an outcase with a lawsuit, it won’t leak the data. But if you’re a young first-time entrepreneur too naiive to do either, it’s unlikely to keep anyone from leaking your secrets. Therefore, the only relevant NDAs are those in which the legally stronger party gets the legally weaker party to sign or when the employer gets the employee to sign. So what does this mean for the young entrepreneur? 1. If you’re getting into business with a large organisation, you’ll probably have to submit to their request. Don’t bring up your NDA. 2. If you’re asking a VC for money, don’t ask them to sign an NDA. 3. If you’re going to pay an employee, get them to sign an NDA.