The Winklevoss twins famously lost their idea for an online student directory to Mark Zuckerberg, who obviously went on to develop the idea and make Facebook a global phenomenon. Zuckerberg now has a personal net worth over $100 billion, while the poor Winklevoss twins are mere millionaires (for now, anyway – we’ll see how their bitcoin investments turn out). Would they be in this same situation if they’d had Zuckerberg sign a nondisclosure agreement (NDA) when they hired him to develop their idea? I don’t know whether Zuckerberg stole their idea or not. But, the lesson here is this: clarity and protection. Had there been clarity in the relationship, there would be no questions about who owned what.
More importantly, should you be using NDAs to protect your valuable ideas in your business journey? And, if so, how?
What is a Nondisclosure Agreement?
An NDA is a contract between two parties where one (typically the employee or hired independent contractor) agrees not to disclose certain sensitive information learned from the other (typically the employer or hiring party). NDAs are often used by companies in tech and manufacturing with patents, trade secrets, and processes to protect confidential information. They are also used by entrepreneurs and startups as they hire third parties to develop and test their ideas.
Benefits of a Nondisclosure Agreement.
First, protecting your information from disclosure. Second, identifying and documenting your ownership of the information. There’s also the added benefit that using an NDA can empower you to put your idea out there whether to test it in the marketplace or bring in a third party to help with a certain aspect of it. This will give you the confidence to let people inside your business and be an invaluable and critical process for fine-tuning your idea.
Should I have my employees and contractors sign an NDA?
Short answer: Yes. You should use NDAs to protect information that needs to be protected.
Long answer: NDAs are useful and simple agreements that are enforceable as long as you draft them correctly (use Drafted Legal’s templates if you are unsure). Nondisclosure agreements can protect your ideas from being disclosed by that third party.
While an idea, itself, is not protectable, it does become protectable as you develop that idea and turn it into something tangible for your business. Ideas are certainly stolen, but, in reality, it’s pretty rare for someone to hear an idea alone, take it, and then turn it into a business. This is because turning a business idea into reality takes a lot of work.
You want to find a good balance between protecting your business and not being so scared of someone stealing this information that you never are able to move the business forward. For example, I’ll often have a client who’s so scared of their idea being stolen, they won’t share it with anyone and have trouble finding mentors and peers to work with because of this reluctance. This is where your business judgment comes in with regard to when and to disclose your business idea.
What Your Nondisclosure Agreement Needs
You want to identify which information is protected. You also want to provide consequences and remedies in the event of disclosure. This can be tricky. Pro tip: Use a prevailing party clause so that you can recover attorneys’ fees if you have to enforce the agreement.
You should have an NDA prepared and ready to use at all times. Contractors like coders, web developers, product designers, and other third parties should be asked to sign an NDA before you begin working together. They typically have no problem signing these agreements.
NDAs become even more important the further along your business is. Early on, it’s unlikely that someone will take your idea and put in all the hard work to make it profitable. (Except maybe Mark Zuckerberg.) Once you’ve put in the hard work yourself, and proven the idea is profitable, that’s when it becomes critically important to protect your information and the secrets you learned to get where you are.
What if an NDA isn’t enough to protect your idea? Learn more about using NDAs together with trade secret law here.
Use good judgment
When starting up, you want to balance the need to get your idea out into the world with the need to protect your ideas, and by using NDAs strategically, you can do that. Work hard on putting your idea into action because the farther you take your idea, the harder it will be for someone to steal and outperform you. And, when possible, always work with people you trust.
- Have an NDA prepared for your business that you can give to all third-party contractors to sign, and remember to pay attention to the state of jurisdiction! Use Drafted Legal to get attorney-drafted and enforceable NDAs.
- Use an electronic service like Docusign for signing if needed to reduce the .
- Print out any emails that you have with the other party that reference the NDA and staple them together with the signed contract. File away with your important papers.