Opening the Kimono: Confidentiality and the NDA
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This is the third column in a series on product licensing from materious’ Bruce Tharp.
So let’s say that you have decided to pursue a licensing contract for your new product idea instead of trying to go into the production and distribution business yourself. You are OK with losing control of the final product outcome, and you are comfortable with the tradeoff of much-less-work for (potentially) much-less-compensation. I say “potentially” because even though going it alone affords a greater percentage of the profit, there is still the issue of “percentage of what?” If you choose the right licensing partner, their ability to sell product through their well-established distribution channels is likely much better than yours. A bigger share of smaller sales can be worse than a smaller share of much bigger sales.
But after the decision to license, the first question that I am almost always asked is, “What’s to keep a company from stealing my idea after I show it to them?” Enter the confidentiality conundrum…
The Buddhist notion of the “beginner’s mind” is a great way to approach the design of a product; similarly, the Licensor’s Mind is also predicated upon an inherent humility. Three of its many tenets are:
- Your idea is not as unique as you might think
- Even if some aspect is particularly unique, profitability does not necessarily follow novelty
- The licensee has more to lose than you do
I know of many designers that are so worried about someone stealing their ideas that they do nothing with their ideas—they remain buried in their sketchbook (and by “buried,” I mean dead). The licensor’s mind is comfortable with risk, knowing that there is no reward without at least a modicum of risk. And generally the risk of disclosing your idea to a potential licensee should be far less daunting than risking hundreds, if not thousands of work-hours, and tens of thousands of dollars when going into business yourself.
Of course, willingness to risk does not imply naïveté. For the licensor, there are two fundamental tools of the trade that predicate the opening of the kimono: the Non-Disclosure Agreement (NDA) and the provisional patent application (PPA). In this article we will discuss the NDA, while the PPA will be discussed in a future column.
The NDA, or Confidentiality Agreement (CA), is a tried and true contract through which two parties agree to handle the secrecy of disclosed information. A simple web search will produce many examples, or you can download a few telling contracts from my own experience with actual companies here.
