1. Initial Questions: Why, When, and How?
Why do you need an NDA? Because your team might reveal sensitive numbers, trade secrets, or even your big vision’s roadmap. The NDA keeps that info locked down.
When should you sign? Ideally, before sharing anything that isn’t public knowledge. If you slip up and start sharing without an NDA, make sure the final NDA covers disclosures made beforehand.
Separate or part of a term sheet? Many startups keep NDAs separate so they can speed up diligence without haggling over term sheet details. If you do include confidentiality clauses in a term sheet, confirm they’re binding (even if the rest of the term sheet is non-binding).
2. Unilateral or Mutual: Deciding Which NDA Fits
In an all-cash deal, sometimes only the seller is disclosing confidential data—making a unilateral NDA enough. However, many founders favor a mutual NDA if both parties might share sensitive details (e.g., a buyer reveals financing details or certain synergy info). Mutual NDAs are also more balanced, which often leads to quicker negotiations. If your startup is also eyeing equity as part of the purchase consideration, chances are you’ll want a mutual NDA.
3. NDA Basics: What’s Actually in the Agreement?
Think of an NDA as a detailed “handle with care” label on your company’s secrets. Core elements often include:
- Confidential Information Definition: Spells out exactly what’s covered—anything from product blueprints to the fact that your deal talks even exist.
- Duty of Nondisclosure: Clarifies whether you can share info with lawyers, accountants, potential co-investors, or other third parties.
- Exclusions: Usually, info already known to the recipient or in the public domain is excluded. Be mindful of how these exclusions are worded.
- Term: Defines how long the NDA lasts (e.g., two years or indefinite). Founders often prefer a lengthier period for highly secret or strategic info.
4. Special Considerations for Public Companies
If you’re selling (or acquiring) a publicly traded company (or a major subsidiary of one), you might need to address:
- Standstill Agreements: Prevents a buyer from going hostile after seeing your sensitive data (common in public M&A).
- Securities Law Compliance: Make sure you’re not facilitating insider trading. The NDA might reference Rule 10b-5 and clarify that buyers can’t purchase or sell shares using any inside info gleaned.
- Regulation FD: Helps keep non-public info from trickling out without public disclosure. The NDA often references compliance with these rules.
5. Typical Limitations of NDAs
Even the best NDA has limits. Once info is spilled, you can’t just “put it back” into confidentiality. Damages can be hard to calculate if your competitor leverages secrets, and it’s tough to prove an indirect breach (like a buyer “accidentally” using your trade secrets). Still, NDAs remain a net benefit—especially if you actively manage disclosures and have a plan in place if something leaks.
6. Core Clauses: Definition of Confidential Info, Exclusions, and More
6.1 Defining Confidential Information
Include details like business plans, IP, financials—essentially everything you wouldn’t want splashed on Twitter. You can choose a method requiring each disclosure be marked as confidential or simply define “Confidential Info” broadly so you don’t miss anything.
6.2 Exclusions
Recipients (often your prospective buyers) will push for standard carve-outs, such as info already in the public domain or info they independently developed. Founders need to ensure these carve-outs aren’t too broad; you don’t want them to claim something was “public” if it only leaked after your handshake call.
6.3 Permitted Uses and Disclosure
Most NDAs let you disclose info to advisors, attorneys, and reps on a “need-to-know” basis. The NDA also lays out the exact purpose: usually “strictly to evaluate or discuss a potential transaction.” If you’re dealing with a direct competitor, you may add further restrictions or set up a “clean team” arrangement to protect especially sensitive data.
7. Term, Return of Info, and Remedies
Term: How long does the NDA last? Some data becomes stale quickly (like sales projections), while other info—like certain trade secrets—can remain valuable indefinitely.
Return or Destroy: Typically, the buyer either returns or destroys your info once talks end. They may want to keep a copy “for their records” or compliance reasons, but you can request a certification that confirms they shredded or erased everything else.
Remedies: Injunctive relief (a court order stopping further disclosure) is often the big one. Also, watch for provisions about who pays legal fees if there’s a breach—some NDAs have the losing party pick up the tab, while others shift all risk to the recipient from day one.
8. Beyond Confidentiality: Key Add-Ons
- Non-Solicitation: Guards against the buyer poaching your team members. Startups rely heavily on key employees, so you don’t want a “friendly buyer” snatching up your CTO if the deal fizzles.
- Standstill Agreements: Especially in public M&A, these prevent the buyer from making a hostile bid after seeing your data. In private deals, it’s less common, but still possible if you’re a larger startup with many shareholders.
- Exclusivity: Sometimes called a “no-shop” clause, you might give the buyer a temporary window where you can’t negotiate with others. This is separate from the confidentiality obligations but often appears in the same documents.
- Announcements: Restricts who can talk about the prospective deal publicly (or at all). You usually want to maintain stealth-mode until you’re ready to break the news.
9. Final Tips and Takeaways
Like most legal documents, NDAs can feel tedious, but they’re an essential shield for your startup’s secrets. Here’s how to navigate them smartly:
- Begin Early: Don’t share big revelations before ensuring the other side has signed on the dotted line.
- Know Your Position: Tailor the language depending on whether you’re primarily disclosing or receiving info.
- Balance Trust and Verification: NDAs don’t fix everything; keep track of who sees your data, and use disclaimers or labeling if necessary.
- Level Up for Public Deals: If your startup or target is publicly traded, watch for standstill agreements and insider-trading compliance references.
- Look to the Future: A well-structured NDA helps set the tone for the entire M&A process, so do it well to avoid headaches (and lawsuits) later.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. For specific questions regarding NDAs or M&A transactions, consult a qualified attorney.
