What are the most important terms in NDAs?
Takeaway: A well-drafted NDA is defined by its precision; the most important terms are a clear definition of what is "Confidential Information," specific exclusions, a clear statement of obligations, and the complete absence of a "residuals" clause.
A Non-Disclosure Agreement is more than just a promise to keep a secret; it is a detailed legal contract with a specific set of operative clauses. While many founders are tempted to download a generic template, this can be a dangerous practice, as you may be agreeing to hidden terms that can gut the very protections you seek.
Understanding the key terms of an NDA allows you to ensure that the agreement you are signing provides real, meaningful protection for your business.
1. The Definition of "Confidential Information"
This is the heart of the agreement. The NDA must clearly and broadly define what is covered. A well-drafted definition will include not just your source code and financial projections, but also the fact that discussions are happening and any analyses that are created based on the confidential information.
2. Exclusions from Confidential Information
The agreement must also clearly define what is not considered confidential. This is critical for protecting the receiving party. Standard exclusions include information that is already public, was already known to the recipient, or is independently developed without reference to your information.
3. The Obligations of the Recipient
The NDA must clearly state what the receiving party is required to do. This includes two main obligations:
The Duty of Non-Disclosure: A promise not to disclose the information to any third party.
The Duty of Non-Use: A promise to use the information only for the specific, defined "Purpose" of the agreement (e.g., "to evaluate a potential business collaboration").
4. Term and "Survival" of Obligations
The agreement should specify a "Term" for the exchange of information, but the confidentiality obligation itself must "survive" the termination of the agreement, often for a period of several years.
Red Flag: The "Residuals" Clause Trap
This is one of the most dangerous clauses a startup can agree to, and it is often buried in the boilerplate of a large corporation's standard NDA.
What it is: A residuals clause states that the receiving party is free to use any "residual" information that is retained in the unaided memory of its employees who had access to your confidential information.
The Danger: This clause effectively destroys the "non-use" provision of the entire agreement. It creates a massive loophole. An employee of the large corporation can listen to your entire secret product roadmap and, as long as they don't consult their notes, they can use the "residual memory" of your ideas to inform their own internal product development.
Your Position: As a startup, you should almost always refuse to agree to a residuals clause. Your ideas and your strategic know-how are your most valuable assets. A residuals clause gives the other party a free license to use them.
Ensuring your NDA is drafted with precision—and is free from dangerous loopholes like a residuals clause—is the key to creating a legally sound agreement that truly protects your company's most valuable secrets.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.