Table of Contents
Introduction
Non-disclosure agreements (NDAs) are super important in any professional relationship. They’re a key legal tool for both investors and startups, protecting sensitive information from being misused by powerful companies.
This article will cover the key things to include in your NDA for investor-startup relationships, as well as best practices, sample templates, and examples.
Before we see the format for a NDA with Investors, we should understand some of the best practices that should be followed.
Best Practices of Using Non-Disclosure Agreements for Investors
While drafting a Non-Disclosure Agreement for Investors, it is important you remember the following points:
- When to ask for an NDA?: It’s generally a good idea to have a Non-Disclosure Agreement (NDA) in place in the long run as well as before you share confidential information with an investor. But it’s not always the best idea to ask for one right at the start of the relationship, especially if you’re a startup.
Investors often get pitched by lots of startups in the same industry, all with similar ideas. Asking for an NDA too early can make them less likely to want to talk to you as they are probably not looking for any legal liabilities right from the start.
Therefore it’s better to wait until the investor has shown real interest in your business and wants to learn more about it before you start talking about an NDA. Besides, there’s no point in having an NDA for information that may already be in the public domain. - Pre-due diligence: Before investors start digging deep into your business, then it is a good idea to have them sign an NDA. This will ensure that all of the confidential data you share during the due diligence process remains protected. However, you must ensure that at this point the investor is committed to your project.
- In all investment scenarios: Whether you’re looking for equity investment, a partnership, or funding for a new project, consider using an NDA. It’s always a good idea to protect your confidential information, no matter what the investment scenario is.
- Customization: Tailor the NDA to the specific details of your investment deal, including the amount of investment, equity stakes, and terms. This will help to ensure that all parties’ interests are adequately protected and everyone is satisfied.
By following these best practices, investors and companies can use NDAs effectively to protect confidential information and maintain the integrity of investment discussions.
Key Terms to Be Added in an Investor Non-Disclosure Agreement
Investors need non-disclosure agreements (NDAs) to protect their interests while also respecting the company’s need for confidentiality. Here are the key components of an NDA for investors:
- Who’s involved: Clearly state who the Non-Disclosure Agreement is between, usually the investor (the one getting the information) and the company seeking investment (the one giving the information).
- What’s confidential: Define what constitutes confidential information. This should include all sensitive data, such as financial information, business plans, trade secrets, and any other proprietary information the investor might see.
- What the company must do: Specify the company’s obligations. They should promise to only share information that’s needed for investment discussions and to keep the information confidential.
- What the investor must do: Outline the investor’s responsibilities. This includes a commitment not to disclose or misuse the confidential information, both during and after the investment discussions.
- When the NDA can be broken: List any exceptions or circumstances under which the investor is allowed to disclose confidential information. Common exceptions might include disclosures required by law or court order.
- How long the NDA lasts: Specify how long the Non-Disclosure Agreement is valid, and under what conditions it can be terminated. For example, it might terminate a certain number of years after the initial disclosure or when the investment discussion ends.
- Which laws apply: Clarify which laws and courts will govern and enforce the Non-Disclosure Agreement. This helps both parties understand the legal framework in case of a dispute.
- What happens to the information after the NDA ends: Include a clause stating what should happen to the confidential information after the NDA expires or is terminated. Often, the investor must either return or destroy all confidential materials.
- What happens if the NDA is broken: Outline the consequences of a breach of the Non-Disclosure Agreement. This might include damages, injunctive relief, or other remedies available under the law.
- Boilerplate clauses: These include provisions related to amendments, the entire agreement, waiver, and the sequence of the agreement. They are standard clauses that are often included in legal agreements, sometimes referred to as standard legal clauses.
- Signatures: Include a section for the parties to sign and date the agreement to make it legally binding.
It’s important to consult with a lawyer or use a template specifically designed for investment-related NDAs to make sure that the agreement adequately addresses the unique needs and risks associated with investment discussions.
Template for Non-Disclosure Agreement
Effective Date: [Effective Date]
Location: [City, State]
Parties
Disclosing Party
Name: [Company Name]
Current Address: [Company Address]
Identifier: [Company Identifier]
Expression Includes: Successors, assigns, and affiliates
Investor Party
Name: [Investor Name]
Current Address: [Investor Address]
Identifier: [Investor Identifier]
Expression Includes: Successors, assigns, and affiliates
Purpose of Investor Non-Disclosure Agreement
The Company and the Investor (collectively, the “Parties”) are interested in exploring a potential investment opportunity (the “Transaction”). In connection with the evaluation of the Transaction, each party, their respective affiliates, and their respective directors, officers, employees, agents, or advisors (collectively, “Representatives”) may provide or gain access to certain confidential and proprietary information.
Definition of Investor-Specific Confidential Information
For the purposes of this Agreement, “Investor-Specific Confidential Information” includes, but is not limited to:
Financial information, investment strategies, and business plans.
Information related to the proposed investment or transaction.
Any other information recognized as confidential in the context of the Transaction.
Exceptions: Investor-specific Confidential Information does not include information that was already known, publicly available, or independently developed.
Non-Disclosure Obligations for Investors
The Investor must refrain from disclosing, reproducing, or distributing Investor-Specific Confidential Information except in connection with the Proposed Transaction.
Protection of Investor-Specific Confidential Information
Both Parties must protect the confidentiality of Investor-Specific Confidential Information and take reasonable measures to prevent unauthorized disclosure or use.
Ownership of Investor-Specific Confidential Information
Investor-Specific Confidential Information remains the property of the Company and cannot be copied or reproduced without prior written consent.
Return or Destruction of Investor-Specific Confidential Information
Upon request, the Investor must return or destroy all Investor-Specific Confidential Information provided by the Company.
Limited Disclosure to Representatives
The Investor may disclose Investor-Specific Confidential Information only to its representatives on a need-to-know basis, provided they sign appropriate agreements.
Legal Process and Disclosure
In case of legal requests for disclosure of Investor-Specific Confidential Information, the Investor must promptly notify the Company and cooperate as necessary.
Use of Names and Trademarks
The Investor shall not use the Company’s name, trademarks, or proprietary information without prior written approval.
Injunctive Relief
Both Parties acknowledge the unique nature of this Agreement and agree to injunctive relief in case of violations.
Indemnification
The Investor shall indemnify the Company for costs incurred due to any Agreement breaches.
Limitation of Liability
Neither Party shall be liable for certain types of damages.
Voluntary Disclosure
Both Parties reserve the right to disclose only necessary information related to the Proposed Transaction.
Term and Termination
This Agreement is effective from the date of execution by both Parties and continues until the Proposed Transaction is terminated.
Authorization
The Parties warrant that they have the authority to enter into this Agreement.
Severability
If any provision is found invalid, the rest of the Agreement remains in effect.
Counterparts
This Agreement can be executed in multiple counterparts.
Relationship of Parties
The Parties have a principal-to-principal relationship.
Governing Law and Jurisdiction
This Agreement is governed by the laws of [State] and subject to the exclusive jurisdiction of the courts in [State].
No Oral Agreements
Modifications and amendments must be in writing.
No Assignment
The Agreement cannot be assigned without written consent.
IN WITNESS WHEREOF, the Parties have executed this Investor-Specific Non-Disclosure Agreement.
Company Signatures: [Company Representative Name]
Investor Signatures: [Investor Name]
Conclusion
Non-disclosure agreements (NDAs) are an important tool for investors and companies alike. They help to protect confidential information and maintain the integrity of investment discussions.
Here are some key takeaways:
- NDAs should be used in a variety of investment scenarios, including early-stage discussions, pre-due diligence, and all types of investment arrangements.
- NDAs should be customized to fit the specific details of the investment deal.
- It is important to clearly define confidential information in the Non-Disclosure Agreement and to limit the disclosure to what is necessary.
- Companies should take steps to secure confidential information and to track and audit access.
- Investors should monitor compliance with the NDA’s terms and seek legal advice if there are any concerns or violations.
By following these best practices, investors and companies can use NDAs effectively to protect their interests and build trust in the investment process.