01 Oct 2015 19:10 IST

Non-Disclosure Agreement: Why it’s not really about protecting secrets

Discovering the true purpose of an NDA

Entrepreneurs, especially those who are inexperienced, tend to give much importance to legal documentation. Their particular focus is on non-disclosure agreements (NDA). .

Most entrepreneurs these days often ask their legal advisors about such agreements, including whether they should have venture capitalists they pitch to sign one (and if you’re wondering what the answer is, it is a no in nearly every single case). It is not that NDAs are useless; it is just that you need to have fair expectations of their use.

They don't keep secrets

An NDA cannot force the signing parties to keep each other’s secrets. Simply put, it gives either party the right to take the other to court if their rights have been violated.

But have you ever thought how hard it is to prove such a thing? Imagine a scenario in which a research organisation is showcasing a new algorithm to a larger research organisation after an NDA has been signed between the two parties. Two months later, the larger organisation launches the new algorithm, claiming to have developed it on its own.

Do you think the smaller organisation would take the larger one to court? Even if it did, would it succeed in proving theft of data? Such a prospect is almost impossible in the real world.

Purpose of an NDA

An NDA is merely a deterrent. If the smaller entity does not want to deal with a lawsuit, it will closely guard its data. Concerned about its credibility being damaged if it were to take the larger organisation to court, it will not leak the data.

But if you are a first-time entrepreneur, it may be difficult to understand how to keep a competitor from leaking or stealing your secrets.

Therefore, the only relevant NDAs are those in which the legally stronger party gets the legally weaker party to sign, or when the employer gets the employee to sign. What does this mean for the young entrepreneur?

  • If you are getting into business with a large organisation, you will probably have to heed their requests. Do not bring up an NDA.
  • If you are asking a VC for money, do not ask it to sign an NDA.
  • If you are going to pay an employee, get them to sign an NDA.

vakilsearch.com is India's largest facilitator of all things legal, including non-disclosure agreements.