Startup NDAs: what to check before you sign

Direction, definition and purpose

Decide whether the agreement is one-way or mutual. A startup pitching to a large company often receives a one-way NDA that protects only the larger party. If both sides will share information, ask for mutual terms. Check that the definition of confidential information covers what you will actually disclose, including oral disclosures, and that the permitted purpose is narrow, such as evaluating a specific partnership.

Example: A startup is asked to sign a large company's NDA before a product demo. The draft is one-way in the other party's favor and includes a residuals clause allowing the recipient to use information retained in unaided memory. That clause could let the recipient's engineers use what they learned. The startup asks for mutual protection and deletion of the residuals clause, or limits it to general skills and know-how.

Term and trade secrets

Many NDAs protect information for two to five years after disclosure. That may be fine for business plans but too short for source code or other trade secrets. Under the federal Defend Trade Secrets Act, information is a trade secret only if the owner has taken reasonable measures to keep it secret and it derives independent economic value from not being generally known. A confidentiality period that ends can weaken that position.

Consider a longer or indefinite period for trade secrets, with ordinary information on a fixed term. Check the exclusions, such as information already known or independently developed, and require return or destruction at the end. The DTSA allows a civil action within three years after the misappropriation is discovered or should have been discovered.

Employee and contractor agreements

The DTSA gives individuals immunity for disclosing a trade secret in confidence to a government official or an attorney solely to report or investigate a suspected violation of law, or in a sealed court filing. Employers must give notice of this immunity in any contract with an employee that governs trade secrets or other confidential information, or cross-reference a policy that does. For this purpose, employee includes contractors and consultants.

If the notice is missing, the employer cannot recover exemplary damages or attorney's fees under the DTSA against an individual who did not receive it. In California, employee confidentiality and non-disparagement terms must also not restrict discussing unlawful acts in the workplace, and Government Code section 12964.5 requires specific carve-out language in many employment agreements.

Your next steps

1. Ask for mutual terms when both sides share information, and review any residuals clause.
2. Protect trade secrets for as long as they remain secret, not just a fixed term.
3. Add the DTSA immunity notice to employee and contractor agreements.