Why You Need to Use NDAs to Protect Your Business

Don’t think of them as aggressive — instead, think of nondisclosure agreements as a fast-track toward trust.

October 1, 2018 4 min read

This story appears in the October 2018 issue of Entrepreneur. Subscribe »

Q: I’m a small-business owner, and we’re in a stage of growth. Do I really need employees and potential partners to sign NDAs? — Chris P., New Jersey

There are many big-business practices that don’t necessarily apply to smaller companies. When you’re a startup, you can cut a lot of red tape without worrying about repercussions. The use of NDAs — that is, nondisclosure agreements, which serve as legal contracts of confidentiality — is not one of those cuttable corners. 

Related: 5 Situations That Require a Non-Disclosure Agreement

Chris, here’s a cautionary tale of my own early ignorance. When I started Pen Name Consulting, I used a basic NDA — just a file I found on the internet. I wasn’t blind to the importance of NDAs, but I was cheap and stubborn, even though my father is a lawyer and advised me against this move. (He eventually became my general counsel.) My NDA was flawed; it didn’t cover enough of the information at my company or place the right restrictions on how people could share it. 

I discovered my error after a business meeting, where I mentioned a potential client and what they needed help with. The person I was meeting with (who signed my weak NDA) then went after that client themselves — ultimately stealing work from me. There was nothing I could legally do. It probably cost me $30,000 in potential revenue. 

Related: Are You Using Non-Disclosure Agreements as Preventive Measures or Backup Plans?

Don’t make my mistake. Creating a strong NDA for your business is simple and not that expensive. Even if you enlist the best lawyer, with a ridiculously high hourly rate, the value you’ll receive to protect your company and your ideas is arguably worth the potential value of the company itself. Or at least the value of one client. 

Now, I understand that it can be awkward at first to ask people to sign an NDA — it seems like you’re telling them you don’t trust them. But think of it this way: If you don’t value your IP, your thoughts and your inventions enough to protect them, then why the hell are you running a business in the first place? 

An NDA doesn’t have to feel like a sign of distrust. Because of the scrappy nature of startups and small businesses, partnerships and strategic hires are the lifeblood of scale and smart growth — but they’re also rife with danger. Every potential partner is also potential competition. Every meeting for growth could be a leg up for the other guy. And every time you share your next big move, you need to know you can trust people. 

NDAs are valuable because they force that trust. They make it legally binding. With the NDA in place, you can be vulnerable, open up and speak more candidly with potential partners. Rather than view the NDA as a barrier, it’s best to look at it as an exclusive invite. 

This is a good thing — the NDA is the front door to learning more and being on the inside. The same can be said for hiring. The moment you have a signed NDA, you’ve connected with someone and you’ve closed the deal. It’s a sign of respect. And when you have respect, you have strong partnerships and hires. That is the foundation of growth for any business. 

Related: 5 Ways to Protect Your Small Business Against a Legal Fallout

Pride and ownership are big parts of owning a company. If that comes across as a little “preachy,” it’s because you need to bear witness to a simple reality: Those who do not invest in protections for their business are likely to watch it fall apart. Or they will be too guarded with information to ever let others in. Either way, an NDA solves those problems. 

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