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| Disclosing important information to prospective customers,
suppliers or investors is a common business dilemma.
It's a dilemma because:
- The 'Disclosing Party' fears being 'ripped off' - that
the ideas will be stolen.
- The 'Receiving Party' fears that it may have similar
work underway and does not want to be accused of pirating
someone's ideas. Investors routinely refuse to sign NDAs,
to review business plans submitted for investment consideration,
because they don't want future options restricted.
It's a trade-off - risk vs. reward.
Success requires implementing the idea. Hence, some
disclosure is necessary to proceed.
Not all relationships progress.
Business relationships - just like personal relationships
- develop through a series of phases: from introduction, to
'dating,' to long-term relationships.
Introductory Phase.
In the introductory phase, parties contemplating a business
relationship need to exchange sufficient information to pass
the hurdles of credibility and mutual benefit.
The initial discussion requires disclosing sufficient information
that the parties can make an informed decision to proceed.
'Dating' Phase.
This is the phase in which nondisclosure or confidentiality
agreements make sense.
To take the relationship to the next level, samples, prototypes
or detailed information need to be shared, with the understanding
that the information will not be divulged.
Long-term relationship.
If you've concluded that there's mutual benefit in proceeding,
and there's a good working relationship, it's time for a
formal agreement that specifies the terms.
If you've concluded that the relationship isn't going to
work, the confidential information of each party is protected,
by a well-drafted NDA.
NDAs come in short and long forms. Key provisions include:
- What is the purpose of disclosure?
- What information is being disclosed?
- How will you designate what information is protected?
(e.g., documents stamped “Confidential,” samples
and media labeled)
- How will information disclosed orally be handled?
(e.g., reduced to writing promptly)
- What's excluded?
- What are the restrictions & obligations?
(e.g., receiving party must protect confidential information,
segregate from general business information, restrict
access and copying …)
- What about ownership rights?
(e.g., disclosing party retains all ownership rights,
no license is granted …)
- What is the term?
(e.g., the disclosing party wants the term to be for the
useful life of its information; the receiving party wants
a specific term such as two years after termination of
business relationship)
Words & Music?
While the words are important, watch the 'music' in the
relationship. Watch the behavior of the potential business
partner. Is this going to be a win-win relationship?
There's an old saying that 'leopards don't change their spots.'
If the potential business partner is inflexible and insists
on terms or actions that seem one-sided, beware!
In conclusion, it's important to maintain perspective on
where you are in the process. Use NDAs to protect confidential
information while you test out a potential business relationship.
Jean D. Sifleet, Esq., CPA
Business Attorney & Consultant
120 South Meadow Road
Clinton, MA 01510
t. 978-368-6104
f. 978-368-6105
P.S. Nondisclosure agreements (NDAs) are an effective tool
and can be one-way or mutual. Another tool for inventors
is the Provisional Patent Application (PPA) - a topic for
a future eNews.
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Jean Sifleet, business attorney, CPA and three-time entrepreneur, is pleased to announce the release of her new book, Advantage “IP”: Profit from Your Great Ideas. Visit the Smartfast Bookstore for details, and to order the book. |
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