What to Look Out for in an NDA?

You’ll want a bullet-proof NDA if you’re planning on sharing any confidential information with another company. As a general rule of thumb, if you’re the disclosing party, you’ll want the NDA to be as broad and all-encompassing as possible. Make sure you consult with your attorney before signing, but in the meantime, here are some of the top things to look out for:

1. Whose information is protected?  
One of the first things you should look out for is whether the NDA covers information flowing from both parties or just from one party. If you’re expecting both parties to be sharing information, make sure it covers this mutual flow. However, if it’s a one way street, the disclosing party will want to keep the agreement unilateral (ie, only protecting information flowing from them). In such a case, it may still be useful for the receiving party to push for a bilateral agreement to protect any information that is inadvertently disclosed.

2. What does the confidential information definition cover?
Take a close look at how the NDA defines confidential information and make sure that it covers all possible disclosures you may be making – for example, documents, business plans, source code, software, financial analysis, marketing plans, customer names, customer data etc. This list will be specific to what you expect to disclose and from industry to industry. Also, make sure it covers oral and visual communication as well as the written words.

3. Is anything expressly excluded?
Check to see if there have been any carve-outs of information that do not receive protection. If you’re disclosing, make this list as narrow as possible (or better yet, delete it) since you’ll want the broadest possible coverage you can get.

4. What can the information be used for?
NDA’s typically include a provision that states the purpose for disclosure. This is important as it limits the receiving party’s ability to use the information for other purposes. If you’re disclosing, you may also find it useful to include limits on who the information may be shared with at the receiving company.

5. What’s the term length?
If you’re the disclosing party, you’ll want a longer term limit. If you’re the receiving party, the shorter the better.

6. Will the confidential information be returned?  
If you’re disclosing, keep a tight reign on the information disclosed and require its return or certified destruction after your discussions have ended. If you’re receiving, try not to include this or alternatively keep it broad, loose and vague.

7. Does it include a ‘residuals’ clause?
Residuals clauses are becoming increasingly popular amongst tech and entertainment companies – so much so that some will not even talk to you unless you agree to this clause. Essentially it allows the receiving party to use any information (such as concepts, ideas, known-how or techniques) that they remember in their minds after they have returned the confidential information. This may sound completely contradictory to the entire purpose of the NDA but here’s the rationale: since companies and their employees talk to many different parties, and read many different things, it’s really hard to remember where someone got an idea from – was it their own brilliance or did they hear/read something from the disclosed information? As a result the residuals clause is included to allow the receiving party to freely use any information they remember provided that the confidential information is returned and they are not relying on it to aid their memory. If you’re the disclosing party, you’ll want to limit this as much as possible and if you have the bargaining strength, remove it completely.  On the other hand, if you’re the receiving party, this could be a life-saver down the road so make sure you include it.

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