About the author: PJ Kee is an associate at the Jones Walker law firm in New Orleans. He and a few colleagues recently launched Trade Secret Insider, which chronicles legal insights on trade secrets, non-competes, computer fraud and confidential data theft. This article was originally posted on tradesecretsinsider.com.
Non-Disclosure Agreements are now staples for start-ups seeking funding from third-party investors. But entrepreneurs shouldn’t rely solely on NDAs to protect their nascent trade secrets. You must think beyond the agreement—especially in tech industries where competitive advantages go stale quickly.
Two recent blog posts highlight helpful strategies for tech entrepreneurs to begin this process, though in different ways. One uses HBO’s new comedy series Silicon Valley to explain what the show’s protagonist and fellow cohorts should have done to better protect Pied Piper’s trade secrets (and why not pause to enjoy the “Incubator” in action).
While the other tells an anecdote about an emerging company’s struggles with an investor-turned-competitor:
Recently, one of my emerging company clients with a truly disruptive idea and a great management team … had been talking to a Fortune 100 company using that company’s “standard” NDA. After months of effort and collaboration, my client was ready to introduce its product at a customer conference sponsored by the Fortune 100 corporate partner. Instead, the partner introduced its own product, using my client’s trade secrets. That presented a fundamental flaw of NDAs: in order to enforce the NDA, my client would have to sue the infringing party. And how many early stage businesses can afford to bring a lawsuit against a Fortune 100 company? Any such lawsuit, especially one alleging unscrupulous behavior on the part of the large company, would draw a quick and very expensive countersuit.
There’s a consensus here. Entrepreneurs cannot take their trade secrets for granted by relying on “standard” NDAs. And I’ve highlighted some of the helpful strategies to protect your trade secrets and intellectual assets:
- Carefully draft the NDA and follow it. Certainly, an NDA is an essential starting point. But you should not rush to the web and print the first one available. The NDA must beyour NDA, one that you understand and contributed to drafting. You’re obligated to ensure compliance with its procedures, or those seemingly “confidential” documents and conversations could become public. This could include simple things, like marking documents “confidential.” But those simple things must be done—and you need to understand your self-imposed obligations.
- Be discerning and somewhat coy. Consider carefully who is on the other side of the NDA and realize that you might be revealing your trade secrets to a future competitor. And don’t disclose the most critical aspects of your trade secrets when discussing or pitching your business.
- Consider patents and copyrights. Though you may lose portions of your trade secret protections, you could simultaneously gain the federal protections that come with owning patents and copyrighted works.
- Always consider requiring non-compete agreements. Whether between fellow business partners, employees of the venture, or independent contractors—a well-drafted agreement could prevent insider trade secret theft and compliments the NDAs nicely.
It’s unavoidable. Entrepreneurs face a fundamental fact—though likely necessary, disclosing trade secrets to third-party investors will always be a risky business. Even with a solid NDA in place. You must start thinking beyond merely relying on the NDA, toward additional strategies for safeguarding your secrets.