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Hey everybody, this is Gene Marks and welcome to another episode of the Hartford Small Biz Ahead podcast. Thank you so much for joining me. This week, I would like to talk with you about NDAs or non-disclosure agreements. I’m sure you’ve heard of them before, seen them around and there’s been a debate going on as to the purpose of them and whether or not they’re really legally enforceable or even worth using at all. My take is they are certainly worth using in certain circumstances and let’s get into that. First of all, what is an NDA? Like I said before, it’s a non-disclosure agreement. So, it’s generally used in three scenarios. Some employers use it with their employees, particularly key employees or senior employees. They make them sign an NDA so that if they leave the company, they can’t disclose any of these proprietary or trademarks or secrets or policies or procedures.
They keep it within themselves and it’s a separate agreement that they do. And there, I have some thoughts on that because there are certain cases where non-disclosure agreements are allowed to be pierced, but I’m gonna get to that in a minute. But employees is one use for an NDA. A second use for an NDA is if you’re selling your business. That’s a big use, particularly as business owners are getting older and there’s been an increase in exits from businesses over the past few years. If you’re going to invite in a potential buyer of your business, they’re gonna be looking at your business, soup to nuts and they will be seeing a lot of your proprietary stuff and you’re gonna be sharing that, and you’re gonna have to, you’re gonna probably want them to sign an NDA.
Now, is that enforceable? We’ll get to that in a minute. But that’s the second use. The third use is if you just bring in any outsider that you happen to be partnering with or using in a project. For example, my company, implements customer relationship management systems and we deal with proprietary data all the time. We might have to migrate one system to another or integrate one database with another database, and therefore we get asked by our clients often to sign NDAs. They don’t want us taking their proprietary data or walking away with it or using it for another client or even for our own purposes. And I happily do that. So how enforceable are these things? And is this something that you should be considering? And the answer is yes, but you do need to know some of the limitations. So for starters, there’s no question that if you’re inviting somebody from the outside into your business to partner with, like me, like a technology person, maybe it’s an accountant, maybe it’s a consultant that you’re bringing in. Maybe it’s a potential partner, a supplier or a customer, and they need to look at certain practices internally or what you’re doing or examine your inventory. It is completely appropriate and very common to ask them to sign an NDA. Now, where do you…
Find an NDA? You can Google non-disclosure agreements samples, and you will find lots of examples online. You can also hire an attorney to draft one up for you, or you can go to sites like Legal Zoom, and they’ve got plenty of examples that you can use there. There’s a lot of resources online where you can grab an example NDA and then customize it to your use. So if you’re bringing in an outside company or an individual to work with you on a project or partner with you on something, it is very common to use it. And is it enforceable? It absolutely is. Particularly if that individual or that company has, they have resources. If you come into a situation where you feel like they have violated your NDA or disclosed proprietary information that they shouldn’t have, you certainly have means to go after them.
And the courts will enforce that and it’s something that you can definitely consider. Not a great situation to be in, but it is what it is. Now, the second area that I mentioned as well for NDAs are with your employees. Now, a lot of companies want to have their employees under NDA, particularly their senior employees, because obviously they’re getting exposed to working with a lot of proprietary information. Now, NDAs recently, have come under scrutiny by the federal government. In fact, just at the end of last year, Congress passed a law that says that if an employee is a victim of like a sexual harassment or discrimination or sees bad things going on at a company, even if they’re under an NDA, they’re not allowed to disclose any of these activities. This law says they’re allowed to do that and employers can’t do anything about it.
So for sure, even if you’ve got a good, strict, tight NDA with your employees, if you’re misbehaving in any way, particularly if it’s in the area of harassment or discrimination, just know that there is now legislation that will allow your employees to pierce your NDA and disclose that publicly. So you are certainly not protected. The other thing that I wanted to make sure of you’re aware is, is that, recently, different agencies of the government, particularly the FTC is, is getting rid of non-compete agreements. And in addition to that, the Department of Labor is looking to actually really limit, or the NLRB, National Labor Relations Board, is looking to really limit, the use of holding onto information based on getting your severance. So in other words, like, “Hey, we’ll pay you a severance when you leave our company…”
As long as you don’t disclose anything about us or talk about us externally. And right now the National Labor Relations Board is saying that is not something that is good and therefore they’re going after companies that use those kinds of practices. So the takeaway is this, if you’re using a non-disclosure agreement with your employees, be very, very careful. They are not the be all and end all. There’s some definite areas where they can be pierced.
It is not gonna provide you with all the protection that you expect it might. So just be wary if you’re using an NDA with an employee, talk to a labor attorney first to see how good it may or may not be. Now, the third area where I see NDAs being used a lot is when a company wants to sell a business. And I get that, right? I mean, you know, you’re gonna sell a business, you’re gonna bring in a prospective buyer, which means you’re gonna be sharing a lot of information with that prospective buyer. So it is very normal to have them sign a non-disclosure agreement. Here’s the thing though, a lot of times if you’re bringing in a buyer of your company, they might be a competitor of yours, right? Or in the same industry or know a lot of the people in the same industry or be somehow connected to what you do.
So you are really exposing yourself. I mean, this isn’t just like a partner here. This is like a potential rival that may show an interest in buying your company. They view all of your stuff, they sign an NDA, and then for all you know, they’re using your secrets without you being aware of it. Even though you’ve got an NDA in place, it doesn’t really scare them away, and it’s very, very tough to prove. So the issue of using a non-disclosure agreement, an NDA when you’re selling your business, really comes down to when you use that NDA agreement. If you are looking at a potential buyer, my advice is, is that you want to qualify the buyer first before that buyer qualifies you. Which means that you probably want to be asking for a lot of information first, from the buyer of your company, which means like financial information, tax returns, some of their practices, some of their history of buying companies.
You wanna make sure that they’ve got the resources and the ability to purchase your company. You want to evaluate them first. And for all intents and purposes, they may probably want you to sign an NDA because you’re gonna be asking to see some of their proprietary information. So if they’re willing to do that with you at an early stage, that’s certainly a good sign. And obviously you want to behave, but it will also tell you that it gives you a little bit of a leg up as it is cuz now you’ve got some of their proprietary information. As you go down the road with that perspective buyer of your company. And as you determine if that buyer is serious about buying your company and also that you’re comfortable with them ethically and morally, and you like the people. When you’re comfortable, you can then issue that NDA and start showing them some of your proprietary stuff. But only until you get to that level, and only until you’ve seen some of their information, first to qualify that they’re a good buyer or not. NDAs will be used on both sides of a transaction like that. But because they’re difficult to enforce, they’re difficult to prove if somebody stole any of your data. They’re only worth so much. So in the end, it still comes down to trust. And although an NDA will provide some assurances for you, maybe some recourse for you, it is certainly…
Not the be all and end all to protect you from having your most proprietary data taken from you in the end. But it’s something to consider. So let me recap guys. First of all, if you’re using an NDA for a potential partner, a customer, somebody on a project, very normal, very common, something that I recommend that you do. Something that we get asked to do quite a lot when we’re working on projects. Get an NDA, find one on the web, use an attorney to construct one. It’s an important thing to do. If you’re gonna use a non-disclosure agreement with your employees, be very, very careful. It can be pierced. There are limitations to it. Talk to a labor attorney before asking an employee, particularly a lower level employee. The government has less concern for high paid executives, more concern for lower people, lower level people that are restricted from saying or doing anything because of an NDA.
So talk to a labor attorney before implementing an NDA for your lower level employees. And finally, if you’re looking to sell your business, you’re gonna need to provide an NDA to a prospective buyer. But try and get an NDA from them to you first because you’re looking at some of their data to qualify them. See how they react to that. And then issue your NDA, sign the agreement with them when you get further enough along that you feel some level of comfort, that they are legitimate and genuine and good people and aren’t gonna steal your proprietary information because an NDA is good, but it is not the be all and end all to protecting you and your data. Those are my thoughts on non-disclosure agreements. You’ve been listening to the Hartford Small Biz Ahead podcast and my name is Gene Marks. If you’d like any more advice or tips or help in running your business, please visit us at SmallBizAhead.com or SBA.TheHartford.com. Thanks you so much for joining me today. I will be back to you next week with another tip on running your business. We will see you then. Take care.
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