NDAs Don’t Work…Or Do They?

Some may argue that non-disclosure agreements (NDAs) have little or no practical usefulness, particularly in the startup space and particularly where the subject of a NDA is mostly likely to come up — in the context of a financing deal. The arguments may go that angel investors and venture capital firms (usually the party the NDA is being sought to be enforced upon) may not like NDAs and given their usually significant bargaining positions as compared to the company seeking investment it is difficult, if not impossible, to get them to actually sign them; or, a NDA may have little value since a startup may not have the resources to prosecute a breach of the agreement in court (or they may even have a difficult time proving a breach in court!); or, if you’re not comfortable disclosing information without a NDA, you shouldn’t be disclosing the information at all.

However, the fact that NDAs continue to be employed in numerous transactions indicates that such agreements do have some worth. First, you need to consider whether other agreements your company is involved in actually *require* you to enter into a NDA in another transaction — the disclosing party may be bound by another agreement to only disclosure confidential information stemming from that agreement under the auspices of another NDA.

It is also worth noting that a well-drafted NDA can actually be enforceable against a disclosure of confidential information. A NDA can allow your company to seek an injunction to stop the disclosure and use of protected information and seek damages for the disclosure (although sometimes the damage is greater than money can ever fix). However, more important than actually enforcing a NDA may be the prospect of enforcement. The party receiving the information may be dissuaded from an unauthorized disclosure of that information by the NDA itself — if that party perceives that your company has the means and willingness to enforce the NDA, the threat of legal liability and monetary damages is something that businesses generally try to avoid. In addition, the party under the NDA may not want to risk damage to its reputation by disclosure — in particular when it comes to startups and private equity firms, a PE firm likely will not want to gain a reputation among startups that any startup who does business with the firm may have its laundry aired!

I’ve previously discussed the potential wisdom in waiting to ask another party to enter into a NDA, particularly in the context of private equity deals; however, when the time is right, a NDA can and does have usefulness and value.