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The Importance of NDAs (Non-Disclosure Agreements) for SMBs 

The Importance of NDAs (Non-Disclosure Agreements) for SMBs 

(Note: This post was initially published on LinkedIn, and the following iteration is a syndicated version of the same.)

NDAs come in different forms depending on the nature of the relationship or transaction. They generally fall into three types:

One, a unilateral NDA imposes information-sharing restrictions on one of the parties. This is usually the secondary party receiving sensitive information from the primary party.

It is especially common in employer-employee relationships or for the discussions that may precede the acquisition of a business.  In a business acquisition, generally, only the seller provides the proprietary information.

Two, a mutual NDA imposes the same information-sharing restrictions on all parties. The NDA treats each party as a giver and recipient of information. The non-disclosure obligations usually are identical for both parties, as are the penalties for breaching the NDA.

Mutual NDAs are especially common between collaborating parties or when there are impending merger discussions between two companies and both participants are doing due diligence on the other party.

Three, a reciprocal NDA is like a mutual NDA except that the scope of the information-sharing restrictions varies between parties.

Reciprocal NDAs are especially common between collaborating businesses with different types of confidential information or where they have very different roles in the relationship.

The Importance of NDAs for SMBs

Requesting an NDA has become standard practice for many companies.

But they are particularly important for small and medium-sized businesses (SMBs) that rely on consultants, vendors, and contractors like larger companies, but often lack the resources of larger companies to create, execute and manage NDAs.

Accordingly, SMBs with trade secrets, customer lists or innovative products, among other critical confidential information, may fail to have NDAs.

Scope of Protected Information in an NDA

An NDA can protect a broad range of company information.

You name it – sales leads, pricing strategy, financial records, passwords, marketing plans, special technology, new processes, product designs – a company’s need to include it in an NDA depends on the nature of the business and the type of information needing to be protected.

On the flip side, an NDA may also identify what information isn’t confidential and is excluded from protection. This may include information that is in the public domain, what’s already known to the other parties, and information that would be against public policy to restrain disclosure.

Common Elements of NDAs

Besides the parties and types of protected information (and exclusions), common elements of NDAs include the scope of the obligation (ex. whom the disclosure cannot be made), the term (ex. commonly 2-5 years), how the information is to be maintained and transferred, and the consequences for breach (ex. arbitration, liquidated damages).

Challenges for Small Business Owners

Small business owners may find NDAs awkward.

On the one hand, NDAs make small business owners feel they’re doing the right thing in protecting their company’s assets.

On the other hand, many small business owners feel NDAs unnecessarily burden otherwise dependable employees.

We say: Get over it. NDAs are critical to small business success.

Considerations for SMBs

NDAs need not be a burden to small business owners.

Small business NDAs are typically short. The rationale for brevity is quite simple: Individuals – and let’s throw in everyone from owners to employees to consultants to vendors – hate to read long documents! Keep an NDA short and the parties will avoid accidental NDA violations.

As a matter of practice, it’s the rare NDA that’s several pages long; that’s generally the case where the information needed to be protected is voluminous.

Misunderstandings may indeed arise over the terms of an NDA that can lead to resentment, bad blood, and employees prematurely departing the company. Small business owners who make this assessment still generally choose to use NDAs.

Here are a couple of reasons why.

An NDA will prevent employees who leave SMBs from sharing confidential information with competitors. So, it’s just good business sense to have NDAs in place, unless you like bankruptcy court.

Likewise, an NDA will reduce an SMB’s chance of financial loss in the event a former employee uses your SMB’s bank password and drains the company’s account or uses a password to leak proprietary company data.

Here are some additional considerations for SMBs using NDAs. Be specific about what you’re trying to protect.

A “kitchen sink” approach may be hard to enforce if what you’re trying to protect is a specific type of information and not everything under the sun.

Legal Considerations

Pay careful attention to the choice of law and venue for any disputes that may arise from a breach of an NDA. Small businesses with limited travel (as well as legal) budgets should select a court that’s nearby.

Let your opponent do the traveling to your closest courthouse.

See if your laws provide for specific performance in the event of an NDA breach and, if so, incorporate that into the NDA.

Specific enforcement will enable you to obtain an injunction quickly against the breaching party which honestly may be more helpful than a monetary judgment against the breaching party years from now.

A Final Word about NDAs for SMBs

NDAs have become so common that there are hundreds of NDA templates available online. But, as we’ve seen, generic NDAs likely lack critical clauses and may create conflicting or confusing rights.

If your SMB has important proprietary information, it deserves “customized” protection from contract management professionals who know NDAs inside out and can draft an NDA that meets the unique needs of your small business.

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