Alexia Hengl, explains why and how a non-disclosure agreement in the initial stages of incubation can be a wise move for all.

The pre-incubation contract is one of the first formal agreements binding selected entrepreneurs to an incubator and its services. Indeed it is the first, and potentially the only legally binding decision the aspiring entrepreneur will take before understanding if her or his project is feasible. On the other side of the same coin, the pre-incubation contract may be the first step for an incubator towards a contractual and lasting relationship with their potential clients. Therefore, getting it right at this delicate stage is imperative.

During the pre-incubation stage both potential entrepreneurs and incubators are required to disclose information and data which they might very well perceive as commercially confidential. And keeping this confidence could be of great importance to the success of the enterprise. This is especially true if, as is usually the case, candidate entrepreneurs have not yet patented or protected their ideas under existing intellectual property provisions.

Therefore, a new entrepreneur, when developing his/her business idea, would be wise to try and sign a non-disclosure agreement(NDA) when disclosing ideas to incubators and other parties involved in assessing initial concepts and market opportunities. NDAs can touch many aspects of the businesses: new materials, product formulae and components, technical drawings or designs, possible customer and prospects’ lists and so on.

On the whole, if achievable, non-disclosure agreements can be perceived as a first, low-cost way to protect a business idea during the project formulation stage, and help put the potential entrepreneur in the right state of mind when sharing their business ideas. Hence, protecting the idea from its inception will ideally provide higher chances for a successful pre-incubation phase by ensuring that an effective and complete information flow takes place. This will lead to an improved selection processes for an incubator and therefore to increased capacities in delivering sound incubation services at a later stage which directly impacts sustainability. It is therefore, clearly not just a “formal” agreement that takes place between the potential entrepreneur and the incubator, but a substantial one that might very well affect the success rate of an incubator. Let’s take a look at some basic elements.

Defining an agreement as a ‘non-disclosure’ agreement does not automatically imply that all the information provided will fall under a non-disclosure obligation for the recipient. The obligation actually stems from the provisions contained in the agreement and not from the definition and title of the agreement itself. This fact brings to mind the most precious, but probably least followed tips of all time: read before you sign.

Confidentiality agreements can be one-way or two-way agreements, depending on whether or not both parties are disclosing confidential information. Under the mutual confidentiality agreement, both the discloser and owner (the party providing the confidential information - in this case typically the entrepreneur) and the recipient (the party receiving the information - in this case typically the incubator and its staff) have to be clearly defined. Affiliated partners, agents or consultants of the recipient are normally required to sign a separate agreement or to intervene in the initial contract if they are privy to confidential information.

There is a mutual interest in better specifying the information deemed to be confidential, or the subject, in the confidentiality agreement. Even if ‘boilerplate’ agreements seem to be the easiest and cheapest way to define the confidential information and limitations, efforts should be made by both parties to precisely identify what should be considered confidential.

Normally the one disclosing the information tends to interpret the subject in a broader way, while the recipient prefers a narrower interpretation of what is covered by the NDA. However, generally, when presenting a product or project at an advanced stage of definition and development, the more specific the information is, the more the perception and minimisation of risks. Indeed, a precise assessment of which element of the business can be disclosed and to what extent should be preventatively done by the owner. The NDA should also be as precise as possible as to how information provided may or may not be used by concerned parties.

Any problem arising after the NDA is signed, with regard to what must be considered confidential, can be resolved by changing or adding clauses to the agreement. Information already available to the public, or made available to the public by parties other than the recipient or its agents/representatives, or information made available to the recipient by a third party without breach of any confidentiality obligations, is not deemed to be infringing the provisions in the NDA.

The NDA should include a statement of reasons defining the rationale behind the signature of the contract and the overall context in which the information is provided.

Under the terms of agreement the parties define how long the confidentiality obligation lasts; in the United States, for example, confidentiality obligations generally last for a maximum of five years, while in Europe it often covers a ten-year period.

Non-disclosure agreements can also provide for an arbitration clause establishing that any claim, dispute or controversy arising between the parties and relating to the information disclosed, or to the applicability and validity of the non-disclosure agreement will be resolved by neutral binding arbitration. Under the arbitration clause parties can pre-define the composition of the arbitration panel if they wish.

A fundamental element of a non-disclosure agreement is the definition of penalties in case the confidential information is divulged. This clause can either define a total amount (in value) in case a breach of confidentiality is proven, or only list the consequences of disclosing illicit information. Non-intentional disclosure can also be defined as subject to penalty. Indeed, a very detailed and tailored agreement may also define a responsibility in case the recipient, in this case the incubator or a potential investor, handled confidential information without due care.

There are obviously instances where protecting a business idea through intellectual property rights can be rather costly and time-consuming. It is no secret as well, that time, to an entrepreneur, is most precious and that cost is a sensitive issue. Simply stated, there are cases where the provision of intellectual property rights is just not feasible.

Hence, a precisely drafted NDA, while not the ideal solution, is certainly a viable “helping hand” and as a starting point for a marriage of incubatee to incubator, it might be the ideal proposal.

ON NDAS WITH EARLY-STAGE INVESTORS…

Investors often take a different view of NDAs than entrepreneurs. Whilst the NDA might give comfort to the entrepreneur it must be noted that many investors are unwilling to enter into such an agreement as they consider it may limit their ability to make commercially sound decisions. For example, if an investor sees a weak team on day one with a great idea but no real ability to execute, and then sees a strong team on day two with a similar idea and a clear ability to execute, he could perceive the NDA signed with the first team as severely limiting his choice in who he wants to work with. The investor could also fear the first (weak) team would exploit the signed NDA to file a lawsuit against him if he is willing to finance the second team’s entrepreneurial project, it being similar to the one described in the first NDA. This situation leaves potential incubatees with the final decision on how much, if anything, to disclose without a signed NDA. However, it should be borne in mind that, generally, incubators have established business relationships with most of the investors approaching their incubatees and that these are normally keen to protect their professional reputations and will be unlikely to breach commercial confidences.

Alexia Hengl is a lawyer with over ten years experience advising public and private clients on industrial relations and commercial and public contracts.