Mum's the word: nondisclosure documents keep your company secrets under wraps

Entrepreneur, July, 1998 by Jacquelyn Lynn

You might think nondisclosure agreements are complicated legal documents or that you might offend someone by asking them to sign one, but neither is true. "Nondisclosure agreements don't have to be lengthy, complicated documents," says attorney Robert S. Bernstein of law firm Bernstein Bernstein and Strickland PC in Pittsburgh. "And they're not insulting. Any astute businessperson will understand and appreciate the importance of a nondisclosure agreement."

You can either write your own agreement or have your attorney draw one up for you. If you write your own, Bernstein recommends having an attorney review your final document to make sure it protects you.

Exactly what should the nondisclosure agreement include? "The more specific you get, the clearer it is," says Bernstein. "But because it's more specific, it covers less." For example, your agreement might stipulate that documents relating to a certain project cannot be removed from your facility, but that doesn't protect you if documents relating to other projects are taken.

"The agreement should be specific enough to cover which information is important and the ways in which it can or can't be disclosed," Bernstein says.

The agreement also needs to spell out the consequences of a violation. You have two basic choices: You can include a liquidated damages provision, which means you determine in advance what the person violating the agreement will have to pay; or you can sue for actual damages, which means you have to go to court and prove the amount of loss you incurred. Your attorney can help you determine which option is better for you.

Bernstein says once you've drafted a solid nondisclosure agreement, it will likely protect you in most situations, and you won't need to go back to your attorney every time you have someone sign it. However, if you're doing something more complex or unusual, such as discussing the company with potential investors or a buyer, the nondisclosure agreement should be customized and include more details.