What is an NDA (Non-Disclosure Agreement)?
A Non-Disclosure Agreement (NDA) is a legally binding contract that establishes a confidential relationship between two or more parties. The signing parties agree that sensitive information defined within the contract—such as trade secrets, financial projections, or unreleased product features—will not be shared with unauthorized external sources.
The goal of an NDA is to create a legal safeguard that enables honest and open communication without risking the public exposure of proprietary business information.
When to Use an NDA NDAs are critical tools in specific business situations:
- Manufacturing: When dealing with suppliers or factories that need access to your product specs.
- Due Diligence: When a potential acquirer is investigating your company during a Merger & Acquisition (M&A) process.
- Contractors: When hiring a freelance developer or consultant who will have access to your source code or customer data.
The Crucial Rule About VCs The most important lesson for a founder is this: Venture Capitalists (VCs) will not sign an NDA when you pitch them your startup.
- Flow of Ideas: VCs review hundreds of similar business plans annually. Signing an NDA for every pitch would create a massive legal risk if they later fund a slightly similar company.
- Signal of Inexperience: Asking a seasoned investor to sign an NDA signals that the founder is focusing on protecting the idea rather than on execution, which is what truly matters.
Key Takeaway: Use NDAs to protect execution details (source code, customer lists) when closing deals. Never use them to protect your core idea when fundraising; investors want to see the execution and market data.
