Non-Disclosure Agreements (often referred to as “NDAs”) are agreements in which one or both parties agree not to disclose confidential or proprietary information received from the other party. Given the universal desire by most parties (whether big or small) to protect their confidential information, NDAs are probably one of the most common types of legal agreements that founders and operators encounter when running a business.
While commonly used, founders and operators aren’t always sure as to the situations in which NDAs are appropriate. In many cases confidentiality obligations are covered under other agreements or obligations, and therefore a standalone NDA may not be necessary.
For this reason, the focus of this month’s blog is discussing the situations in which a standalone NDA may make sense, as well as identify situations when NDAs are less common or not needed (note next month we’ll separately discuss the specific provisions to look out for when reviewing an NDA).
- Partnerships and Technology or IP Discussions
When entering into a discussion with new partners, or discussing company technology or intellectual property (“IP”) with outside parties, companies should always consider getting an NDA in place. Often these NDAs are “mutual” NDAs (each party has an obligation to not disclose the other party’s confidential information). Keeping the NDA mutual usually reduces the amount of redlines and turns on the NDA, as each party stands to benefit from the confidentiality obligations of the other party.
Sometimes founders or operators are worried that asking for an NDA may slow down or prevent a meeting from occurring. In our experience, asking for an NDA generally is not seen negatively (if anything it shows the operational maturity of the company) and in some cases, the parties may have a discussion while their respective legal departments “hash out” the NDA, under the understanding that the discussion will ultimately fall under the NDA. In addition, best practice for many companies is to send out an NDA well ahead of a scheduled meeting, so that any review/redlines to the NDA can happen ahead of the meeting.
- Vendors & Contractors
Contractors working on key aspects of a company’s technology or product should always be subject to a contractor agreement that not only includes confidentiality provisions, but also ensure that the company retains ownership of any deliverables (and any intellectual property rights in those deliverables) that the contractor provides or creates for the company. Where a contractor agreement does not include confidentiality provisions (or if the company is entering into sensitive discussions with the contractor before formalizing a contractor agreement) then the company should consider having the contractor sign an NDA.
For standard vendor provided products or services, you should also be sure that some confidentiality obligations are in place. While this may be covered in the vendor agreement, often vendor agreements are one-sided in favor of the vendor. In such cases, a stand alone NDA may make sense where you are concerned about vendor access to sensitive or confidential information, or you should consider negotiating and amending the vendor agreement to include confidentiality obligations protective of the company.
- Lawyers, Accountants, other Professional Service Providers
Attorneys have special duties and obligations to their clients, including the attorney-client privilege, that protects the confidentiality of communications between a client and that client’s attorney. The client “holds” this privilege and therefore only the client (and not the attorney) may waive the attorney-client privilege (except in certain specific instances).
Even in instances where a potential client has not formalized an engagement with an attorney they are interviewing, and even in instances where the client has never paid the attorney, if the conversations were in expectation of a potential attorney-client relationship, then the attorney-client privilege still applies to such communications.
Likewise, for accountants and other financial professionals, in many instances accountants are subject to a fiduciary duty to their clients, which means they are legally obligated to act in the clients best interest, which may imply a confidentiality obligation.
Regardless, typically professional service providers, as part of their engagement, will sign an engagement letter or contract which would include confidentiality obligations on the part of such professional service provider, and thus you don’t typically see standalone NDAs in place between such service providers and a company or client beyond the engagement agreement itself.
- Founders
Where a company has more than one founder, sometimes a question comes up as to whether each of the founders should sign an NDA.
It is NOT common to see founders sign standalone NDAs. That’s not to say that founders aren’t or shouldn’t be subject to confidentiality obligations. For founders, confidentiality obligations are often included as part of an inventions assignment agreement that the founder enters into at the formation of the company (sometimes called a technology assignment agreement or “TAA” that is included as part of the standard set of incorporation docs founders execute as consideration for their receipt of their founding shares).
Founders that haven’t signed a TAA may also be subject to confidentiality provisions pursuant to an inventions assignment agreements (sometimes referred to as a proprietary information and inventions agreement (“PIIA”) or a confidential information and inventions assignment agreement (“CIIAA”)).
Generally speaking, most outside institutional investors will want to see founders subject to formal confidentiality obligations, but usually as part of a formal assignment of that founders’ intellectual property rights pursuant to a TAA or a PIIA/CIIAA.
- Employees
In the same way that founders should be subject to confidentiality obligations, employees should also be subject to confidentiality obligations. In some instances companies have employees sign standalone NDAs as part of the hiring/onboarding process. However, the more common approach is to have employees subject to confidentiality provisions pursuant to a standard inventions assignment agreement (PIIAA or CIIA).
We always recommend that companies include a form of CIIAA or PIIA as part of their onboarding process when bringing on new employees, and this is something that outside investors specifically look for as part of the due diligence when investing in a company.
- Directors
While directors on a company’s board (“Board”) are generally subject to confidentiality obligations, these are typically not enforced through a standalone NDA.
For many early-stage private companies, the initial directors are also the founders, in which case they usually are already be subject to the typical employee agreements such as a TAAs or PIIAAs/CIIAs which would provide for confidentiality restrictions.
Outside directors (eg those not company employees or founders) are typically either appointed by investors (possibly pursuant to a formal requirement in the company’s certificate of incorporation or in an investor agreement such as a voting agreement) or are considered “independent” directors (eg not a founder/employee and not an investor) who are appointed or voted on by all or a portion of the shareholders or Board.
If the outside director is investor-appointed, assuming the investor has signed typical National Venture Capital Association (“NVCA”) documents in a financing, then such investor will already be subject to confidentiality obligations pursuant to such NVCA documents (typically pursuant to an Investor’s Rights Agreement”).
If the outside director is an “independent”, some companies enter into a separate director agreement which may provide for an equity grant, a per diem or other expense reimbursement provision, and may also include a confidentiality provision.
That said, all directors (whether outside directors, independent directors, or employee/founder directors) are subject to what are known as fiduciary duties under the corporate law of most jurisdictions – these are duties that directors must uphold in serving as a director to the company. While under Delaware corporate law there is no explicit standalone confidentiality obligation, courts typically recognize an implied duty of confidentiality which flows from the director’s duty of loyalty and duty of good faith that they must uphold with respect to the company and its shareholders.
For these reasons its not common to see directors (whether outside directors or not) sign a standalone NDA in conjunction with their appointment to the Board.
- Office Visitors
While much less of an issue in this age of remote work, companies that maintain physically offices will want to consider whether to require office visitors sign an NDA. This is especially true of companies that might have an open floorplan where it may be easy for visitors to see whiteboards, peer into various conference rooms, see people’s computer screens, etc.
For companies large enough to have a receptionist and/or a reception desk, there are technologies and services that exist (eg visitor check-in software on ipads or other touchscreen devices) that some companies use to streamline the NDA signup process for visitors.
Since many of the visitors might be existing partners and/or clients, ideally the “visitor” NDA is lightweight and specific to the visit and visitor, to avoid issues with visitors balking at signing a heavy-handed NDA. That said, for early stage companies and/or those without much of a physical office or presence, requiring office visitor NDAs may be overkill. Still, companies should always be mindful of what they are showing and sharing with visitors in their space if they do not require an NDA.
- Hiring & Interviews
When managing the hiring and interview process for employees and contractors, many companies ask for NDAs at some point during the process.
Job postings and hiring requirements are almost always publicly posted, so it is less common to ask for an NDA during the initial screening process and/or during the initial calls that the hiring manager or recruiter might have with a potential candidate. In such cases, information shared during these screening calls should be kept at a high level, and such information should not include sensitive information about the company or its products, technology or business plans.
However, for interviews where questions will likely be asked from both sides that may = go into the details of a company and its technology, business and operations, it is fair for a company to ask for an NDA to be signed by the interviewee. This could be done onsite before the interviews begin, or an NDA can be sent out to the candidate prior to a remote interview. To extent you do ask for an NDA, we always recommend getting an NDA in place before the start of the interview, as getting NDAs after the fact is often difficult.
- VCs & Institutional Investors
VCs and other institutional investors (especially those located in the Bay Area and on the West Coast) historically have resisted signing standalone NDAs at the time of discussing possible investment in a company.
The VC’s rationale for this resistance has been to preserve flexibility and avoid legal liability which could result from signing NDAs with founders (VCs are often pitched by hundreds of startup founders and may receive over a thousand pitch decks over the course of a year, many times in a similar technology or space)
While there has been some softening of that resistance, in part because of more participation from east coast based VCs (some of which have a private equity or hedge fund background, and who therefore are more accustomed to signing NDAs in their respective spaces), and in part because of resistance by founders, generally speaking it is not typical to expect VCs or other early stage institutional investors to sign a standalone NDA with a company they are talking to (although note per above that once a VC has invested in the company, they may later become subject to confidentiality obligations via the Investor’s Rights Agreement with the company).
- Acquirors; Mergers & Acquisitions (M&A)
While it is not customary for VCs to sign an NDA when discussing a potential financing round, it generally IS expected that an acquiror sign an NDA with a proposed acquisition target. In many cases, the acquiror is in the same or an adjacent business as the target, and therefore the disclosure of, and use of, a target’s confidential information (and vice versa) could be detrimental to the party disclosing the information if used improperly.
In the context of an M&A, because the information being disclosed is often voluminous, detailed, and highly competitive, and because the use of (rather than just the non-disclosure of) the confidential information is at issue, special NDAs are typically required for use in the context of an M&A. Thus, if you are entering into M&A discussions, you should NOT rely on a standard, off the shelf NDA, but one specifically drafted for use in the context of an M&A.
Finally, when thinking of timing as to when to ask for an NDA during M&A discussions, while sometimes parties will discuss an M&A and may even negotiate an LOI or term sheet without an NDA, generally at latest a party should always enter into an NDA before conducting detailed due diligence with the other party.
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