Why do I need to sign an NDA with my business partners?

Entrepreneurs may wonder whether they should sign a non-disclosure agreement with their co-founders. After all, they’re on the path to a common goal and wouldn’t want to jeopardize the success of their business, right? You would think that would be the case, but when entering into a business with friends, co-founders often expect and rely on the best outcomes - rather than preparing for the worst.

Here are two (2) reasons why you should sign an NDA with your co-founders:

1. The company will survive the individual relationships

During the honeymoon stage, it may appear that nothing can ever break the founders apart. However, it’s easy to outgrow positions, people and ideas. For this reason, founders remaining in the company will want to ensure that those leaving the company will not disclose the company’s confidential information to third parties or competitors. Founders remaining in the company will also want to ensure that those leaving do not use confidential information in order to compete with the business.

Preference would be to sign a non-disclosure agreement during the honeymoon stage, in order to avoid contentious disputes during the more difficult resignation/termination stage.

2. Working for the benefit of the corporation

When individuals partner up to bring an idea into reality, it’s important to remember that their work is solely for the benefit of the business, and not for themselves individually.

Entering into a non-disclosure agreement will ensure that the founders will not use business ideas intended for the benefit of the company to benefit themselves, instead.

When entering into an agreement with potential co-founder(s), parties can choose to sign a mutual non-disclosure agreement. That way, one party (hopefully) won’t think the others are targeting them personally or implying that they will leak confidential information, since everyone is accepting the same non-disclosure obligations.

Discuss the need to sign an NDA with your co-founders early on in the process, and point out the benefits to everyone, including the company. After all, if you’re dreaming of selling your shares for a huge profit some day, the purchaser will likely insist on an NDA - so put one in place that protects everyone at all stages of the business!

For sample non-disclosure agreement templates, check out Clausehound’s Small Business Law Library!