Starting a business with a co-founder is a tricky task. While a co-founder should be your confidante when it comes to discussing business matters, you should have adequate safeguards to prevent any unauthorized disclosure of confidential information. Typically, co-founders’ agreements contain strong confidentiality and non-disclosure clauses. But, despite such clauses being present in a co-founders’ agreement, it is preferable to separately enter into a Non-Disclosure Agreement (NDA) with your co-founder. A NDA will give you added protection and would protect all confidential information (whether accessed or developed by the co-founder). It would also protect any trade secrets the co-founder may be in the know of. Many times, founders miss out on key clauses which should be included in a NDA with a co-founder.
Through this post, we bring to you a checklist of the key clauses to be included in an NDA with a co-founder.
1. Definition of Confidential Information:
Defining Confidential Information outlines the scope of what all information is protected by the NDA. A common mistake which founders make is to define confidential information in a restrictive manner. For instance, it may not be correct to use phrases such as, “Confidential Information would include all information marked as Confidential” or to specifically list out each and every item being covered as confidential information. A broader definition of confidential information should be included. All information which the co-founder accesses or develops, whether in written or oral form should be covered within the ambit of Confidential Information.
2. Term/Duration of the Agreement:
A NDA can either be valid permanently or for a period of at least two to five years, post the ceasing of association of the co-founder with the start-up. As a co-founder is in the know of proprietary and confidential information regarding the company, it is preferable that the term be kept as long as possible.
3. Non-Disclosure Obligations:
This is the operative part of an NDA. This clause mandates the co-founder to not disclose any confidential information which he accesses or knows or even develops on his own without prior authorization of the company. Typically, the prior authorization should be obtained in writing. However, these obligations are typically subject to certain exceptions. For instance, if the confidential information is already in the public domain or the co-founder is required to disclose the same under any law or court order, the non-disclosure obligations may not apply.
4. Purpose:
While you impose obligations on the co-founder to not disclose the confidential information to a third-party without prior written authorization of the company, there may be instances, where he would need to do so. For instance, if the co-founder is engaging a potential client, he may have to reveal certain confidential information. Hence, the purposes for which the confidential information can be used should also be listed out specifically in the NDA.
5. Mutual or One-Sided:
A NDA can either place obligations on both the parties entering into a NDA or only one party. A NDA with a co-founder should be one-sided. The non-disclosure obligations should solely be in the co-founder and not on the company.
6. Return of Confidential Information:
After the NDA expires, the co-founder should be required to return all the confidential information he is in possession of to the company or destroy the same. This is important to prevent the co-founder from leaving with sensitive information and also in some cases, the intellectual property of the company.
7. Remedies:
Injunction as a remedy should be necessarily included in a NDA. An injunction would prevent the co-founder from using the confidential information in any improper or unauthorized manner.
8. Boilerplate Clauses:
Common clauses such as jurisdiction, dispute resolution etc. should also be included in a NDA. Many people often make the mistake of missing these out.
To summarize, signing and executing a NDA is essential before you enter into a business relationship with a co-founder. A NDA with a co-founder should be signed and executed in the company’s name. The terms should not come across as too onerous, as the beginning of a relationship should not be strained with unnecessary negotiations. It is best if you hire a lawyer to draft your NDA. If you have any queries regarding how to draft your NDA, do reach out to us at support@lexstart.com and a member of our highly qualified legal team would reach out to you. We are there at each step to guide you and help you through your start-up journey!