Non-Disclosure Agreements for Entrepreneurs: Protecting Your Business When Seeking Funding
Learn how non-disclosure agreements (NDAs) protect your business ideas and confidential information when meeting with potential investors, with essential guidance for entrepreneurs and startup founders.
Introduction
A Non-Disclosure Agreement (NDA) is a legally binding contract that establishes a confidential relationship between you, as a business owner or entrepreneur, and the party with whom you're sharing sensitive information, such as potential investors. When you're seeking funding for your business, an NDA helps protect your proprietary information, trade secrets, business plans, and other confidential details from being disclosed to competitors or used without your permission. This document serves as your first line of defense in maintaining control over your valuable intellectual property while you navigate the funding process.
Key Things to Know
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NDAs should be signed before sharing sensitive business information with potential investors or funding partners.
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Not all investors will sign NDAs, particularly venture capital firms and angel investors who see many similar ideas.
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A well-drafted NDA clearly defines what information is considered confidential and what is excluded.
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Standard NDAs typically include a specific time period for which the confidentiality obligations remain in effect.
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There are different types of NDAs: one-way (unilateral) where only one party discloses information, and mutual NDAs where both parties share confidential information.
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Overly broad NDAs may be difficult to enforce, so specificity about what's being protected is important.
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Include specific remedies and consequences for breaches of the agreement to strengthen enforceability.
Key Decisions
Non-Disclosure Agreement Requirements
Clearly identify all parties to the NDA, including full legal names, business entities, addresses, and contact information. For business entities, include the type of entity (LLC, corporation, etc.) and state of formation.
Specify which party is the Disclosing Party (providing confidential information) and which is the Receiving Party (receiving confidential information), or if both parties will be sharing confidential information (mutual NDA).
Kentucky Requirements for Non-Disclosure Agreement
Clearly defines what constitutes confidential information under Kentucky law, including trade secrets as defined in the Kentucky Uniform Trade Secrets Act (KRS 365.880 to 365.900). The definition should be comprehensive to include all proprietary information, business plans, financial data, and other sensitive information that requires protection.
Acknowledges protection under the federal Defend Trade Secrets Act (DTSA), which provides federal jurisdiction for trade secret misappropriation and allows for civil seizure of property in extraordinary circumstances. The clause should include the required notice to employees and contractors about whistleblower immunity under the DTSA.
Specifies the duration of confidentiality obligations in compliance with Kentucky contract law. While Kentucky does not impose specific time limits on NDAs, courts may scrutinize overly lengthy or indefinite terms for reasonableness. The clause should establish a clear timeframe that is reasonable for the industry and type of information being protected.
Identifies information not considered confidential under Kentucky law, such as publicly available information, information independently developed, or information rightfully received from third parties. This aligns with both Kentucky's Uniform Trade Secrets Act and federal standards for confidentiality exclusions.
Details the specific duties of the party receiving confidential information, including maintaining secrecy, limiting access to information, and using appropriate safeguards. This clause should comply with Kentucky's standards for reasonable efforts to maintain secrecy under the Uniform Trade Secrets Act.
Outlines available remedies in case of breach, including injunctive relief, damages, and specific performance as recognized under Kentucky law. The clause should acknowledge Kentucky courts' authority to grant injunctions for threatened misappropriation of trade secrets.
Requires the receiving party to return or destroy all confidential information upon termination of the agreement or upon request. This clause should specify the procedure for certifying compliance with this requirement in accordance with Kentucky business practices.
Establishes Kentucky law as the governing law for the agreement and designates Kentucky courts as having jurisdiction over disputes. This clause ensures the agreement will be interpreted according to Kentucky legal standards and precedents.
Includes restrictions on soliciting employees, customers, or clients that are reasonable in scope, geography, and duration to be enforceable under Kentucky law. Kentucky courts generally enforce reasonable non-solicitation provisions that protect legitimate business interests.
Acknowledges the validity of electronic signatures in accordance with both Kentucky's Uniform Electronic Transactions Act and the federal ESIGN Act, allowing for electronic execution of the NDA.
Provides that if any provision of the agreement is found to be unenforceable under Kentucky law, the remaining provisions will remain in effect. This clause helps preserve the overall agreement if specific terms are challenged in Kentucky courts.
Clarifies that no intellectual property rights or licenses are granted to the receiving party except as expressly stated in the agreement. This clause protects the disclosing party's intellectual property rights under both Kentucky and federal law.
Addresses situations where disclosure may be required by law, court order, or governmental authority, requiring the receiving party to provide prompt notice to allow the disclosing party to seek a protective order. This clause acknowledges legal compliance requirements while protecting confidentiality to the extent possible.
Establishes procedures for resolving disputes, potentially including mediation or arbitration before litigation, in compliance with Kentucky's Alternative Dispute Resolution procedures. This clause can help avoid costly litigation while ensuring enforceability under Kentucky law.
Specifies that any waiver or modification of the agreement must be in writing and signed by both parties to be effective under Kentucky contract law. This prevents informal or implied modifications to the confidentiality obligations.
Addresses whether the agreement may be assigned to third parties and confirms that the agreement binds successors and assigns. This clause ensures continuity of confidentiality obligations in case of business transfers or reorganizations.
Acknowledges that certain confidential information may constitute material non-public information under federal securities laws, prohibiting insider trading based on such information. This is particularly important for NDAs related to investment discussions.
States that the NDA constitutes the entire agreement between the parties regarding confidentiality, superseding any prior agreements or understandings. This clause prevents claims based on discussions or representations not included in the written agreement.
Establishes procedures for providing legal notices under the agreement, including acceptable methods of delivery and when notice is deemed received. This ensures clear communication channels for matters related to the NDA.
Clarifies that the NDA does not create any agency, partnership, or joint venture relationship between the parties. This prevents unintended legal relationships under Kentucky business law.
Frequently Asked Questions
You should consider using an NDA before sharing detailed business plans, financial projections, proprietary technology, or trade secrets with potential investors. The ideal time is after initial interest has been established but before diving into specifics that could be valuable to competitors. However, be strategic—requesting NDAs too early in discussions with professional investors might signal inexperience, as many VCs and angel investors typically won't sign them for initial pitches.
A comprehensive NDA should include: (1) Clear definition of what constitutes confidential information; (2) Specific exclusions (publicly available information, information already known to the recipient, etc.); (3) The obligations of the receiving party; (4) Permitted uses of the confidential information; (5) The time period for which the NDA remains in effect; (6) Remedies in case of breach; and (7) Return or destruction of confidential information requirements when the relationship ends.
Professional investors, particularly venture capitalists and angel investors, often refuse to sign NDAs because: (1) They see numerous similar ideas and signing NDAs for each could create legal complications; (2) It could restrict their ability to invest in similar companies; (3) They rely on their reputation in the industry and typically don't share entrepreneurs' ideas; and (4) They may view NDA requests as a sign of inexperience. Focus instead on building relationships with trusted investors and consider what information you're comfortable sharing without an NDA in early discussions.
The duration of an NDA should balance your protection needs with reasonableness. For most small businesses and startups, a term of 2-5 years is common. Technology-focused businesses might need longer terms if their intellectual property has a longer development cycle. Perpetual NDAs (those with no end date) are generally harder to enforce, as courts may view indefinite confidentiality obligations as unreasonable restraints. Consider the shelf-life of your confidential information when determining the appropriate duration.
A one-way (unilateral) NDA is used when only one party (typically you as the entrepreneur) is disclosing confidential information to another party (the potential investor). This is common in initial funding discussions. A mutual NDA is used when both parties exchange confidential information. For example, if an investor shares their proprietary investment criteria or portfolio performance data with you, a mutual NDA would protect both parties. Choose the type that best reflects the nature of information being shared in your specific situation.
If your NDA is violated, you typically have several options: (1) Send a cease and desist letter demanding the recipient stop using or disclosing your information; (2) Seek an injunction to prevent further disclosure; (3) Sue for damages resulting from the breach; (4) Pursue specific remedies outlined in your NDA, such as liquidated damages. To strengthen enforceability, include specific provisions about jurisdiction, choice of law, and dispute resolution methods in your NDA. Document all confidential information shared and maintain evidence of the breach to support potential legal action.
While templates can be a cost-effective starting point, having an NDA customized to your specific business needs provides better protection, especially when significant intellectual property or trade secrets are involved. For early-stage entrepreneurs with limited budgets, a well-reviewed template from a reputable source can be modified to suit your needs. As your business grows or for particularly sensitive information, investing in a custom-drafted NDA by an attorney familiar with your industry is advisable. The cost of customization is typically much less than the potential cost of inadequate protection.
If an investor declines to sign an NDA, consider these alternatives: (1) Limit initial disclosures to high-level information that doesn't reveal your secret sauce; (2) Stage your disclosures, revealing more details as the relationship progresses; (3) Use a confidentiality clause in a preliminary agreement instead of a full NDA; (4) Focus on investors with good reputations and track records of ethical behavior; (5) File for appropriate intellectual property protections (patents, trademarks, etc.) before disclosing; (6) Document all meetings and communications to establish a paper trail of what was disclosed and when.