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When to Use Nondisclosure Agreements

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Nondisclosure Agreements protect trade secrets and other confidential information that you don't want publicly available. However, you don't need one for every occasion or conversation. Below are examples of situations where you should and shouldn't use an NDA.

When discussing new product ideas with potential partners or investors who might help you bring those ideas to market.

Use an NDA Don't Use an NDA
To protect trade secrets, i.e., any intellectual property you can't trademark, copyright, or patent. There are two keys to protecting trade secrets: (i) Keep the secret and (ii) have lots of evidence (like NDAs) showing all the effort your company put into maintaining its secrecy. At Uncle Jim's funeral . . . you're not talking business at a solemn family gathering, are you? Besides, you don't have to worry about Uncle Jim flapping his gums any more.
Every shareholder or LLC member should sign an NDA if the venture has or may develop confidential information. Even though owners typically have certain legal duties not to compete with the company, those obligations are only enforceable through litigation and terminate when the ownership interest is surrendered. You need something more robust that will last. For LLC's, the NDA can be incorporated into the Operating Agreement since that's already a contract. It's not sufficient to include them in corporate bylaws because while they're binding on the entity they don't create a specific legal obligation of confidentiality. Use a shareholder's agreement instead. Your lawyer is already governed by an ethical duty to preserve your confidences and secrets. She also can't be compelled by subpoena to disclose them in most situations. So you don't need to have counsel sign a separate NDA.
Any employee who can potentially access confidential information should sign an NDA. Even though employees may have some legal duties to the employer, they typically would require litigation to enforce and don't provide nearly enough protection. And judges will rightly wonder "if this information is so secret and important, why didn't this guy sign an NDA?" On a date. Trying to impress a potential love interest with all the brilliant ideas you've had? Fine, but don't share company secrets. You're going to have to walk that fine line trying to explain what you do without spilling the beans or using some cheesy line like "I'd tell you but then I'd have to kill you." That line sounded clever coming from Tom Cruise in Top Gun. You're no Tom Cruise.
Any contractor who can potentially access confidential information. Contractors' legal duties are set forth in the agreement. If they don't bind themselves in writing not to use or disclose your venture's secrets, there's nothing else to stop them. If you're not sure if the contractor is going to have access to confidential information, err on the side of caution. Your priest, rabbi, reverend, shaman, imam, spritual guru, etc. Why would you discuss business with these people anyway? Your life is probably a mess and you've got more important issues to discuss, like how to save your soul from eternal damnation because everyone knows you cheat on your golf score card. Like, every time!
When potential investors do their due diligence. You've got to open your books and records so investors can decide whether to fund the venture. They get to see EVERYTHING, so make sure they execute an NDA that keeps them from either sharing or using your confidential information. They'll be expecting one. Before sex. Let's face it. If it's that small . . . word's going to get out no matter what gets signed.
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