Nondisclosure agreements: protect your interest - includes information on confidentiality agreement, Technology & Business Communications, Inc

Nondisclosure agreements: Protect your interests

A few years ago, the entrepreneurial publisher of a successful small magazine decided that his publication could become a giant operation, given an infusion of outside resources. He therefore approached a large publishing company that had the resources to expand his publication. During months of negotiation, the large company learned everything about the small entrepreneur's business it could ever want to know. No nondisclosure confidentiality agreement in which the large company promised not to reveal or otherwise use information given to it by the small publisher was signed. After shaking hands on a deal, the large company suddenly changed its mind.

Then the inevitable happened. The large company adopted the entrepreneur's idea and put out a successful competing publication in regions that had been part of the expansion plan shown to it by the entrepreneur.

The small publisher had no legal recourse--there was nothing marked confidential, no letter or contract to point to. This true story is not even the worst case scenario. After all, the large company could have competed anywhere with impunity.

If you are a small publisher considering selling one or more magazines or looking for an investor to help you expand your operations, you could be running a fool's errand unless you have the other party agree to sign a nondisclosure agreement at an appropriate point in the proceedings. In this type of situation, small publishers have to do what large publishing firms have always done to protect themselves. And yet, in my experience with small publishers, seven out of 10 fail to appreciate the need for the legal protection of a nondisclosure agreement.

All that being said, it is also true that nondisclosure agreements are not always appropriate. A small publisher may be wary of putting off a potential investor by waving a nondisclosure letter in his face. Clearly, I do not suggest that small publishers should do something that will prevent even the examination of an idea by another company. If you desperately need to raise $500,000 or be out of business in 90 days, you may be in no position to insist on a nondisclosure agreement.

In deciding whether to require a nondisclosure letter, you have to resort to a "sliding scale of necessity." On one end of the scale is an ideal situation where you're in a position of strength and have all the time in the world. But that's rarely the case. On the other end of the scale, you may be facing someone who is fabulously interested. But you have just one crack at him--and don't want to ruin the opportunity with a letter. The exigency of the moment may call for drastic action. Somewhere off the scale are the many companies that fund new ventures, but will not sign confidentiality letters for new magazine ideas. They see hundreds of ideas, so few truly new.

In general, it's better to release information in stages. You usually don't have to show all your cards at once. You can give some nonconfidential data and then, if the person comes back for another bite, say, "All right, but if you want more information, please sign this letter." Nonconfidential information could include copies of your magazine, media kits, direct mail pieces, a history of your company, or a general business plan telling where you want to go with the company. I seldom hesitate to send someone this kind of material. Confidential information, on the other hand, could include circulation data, lists of advertisers, information about insertion orders or advertising practices, a five-year plan, or any other financial information.

See a lawyer first

Given the complexities of this area, I strongly encourage you to seek the aid of an attorney in preparing a confidentiality letter. Most general corporate counsel can help you, although it is probably best to use a lawyer who understands the publishing business.

Just a few words about what the letter should contain. Its principal purpose is to obtain the written agreement of your prospective purchaser/investor that it will not disclose any confidential information to third parties, and that it will use such information only for the purpose of evaluating the property under consideration.

It may also be important to you that the very fact that you are interested in selling or seeking new financing not be disclosed to third parties; if this is the case, such a commitment should also be included in the letter.

The letter should also include an agreement not to disclose any confidential information except on a need-to-know basis to the recipient's employees, agents and professional advisers, who agree to be bound by the terms of the letter.

Most letters also contain a provision that the terms of the letter do not apply to information generally known to the public, information obtained legitimately from other sources, or information previously known to the receiving party.

When the letter is signed and returned, take careful note of any changes made by the other party; sometimes significant changes will be found. It's common to say, "Okay, I've got it--fine," and not focus on how the document has been changed.

I also strongly recommend that small publishers establish a central source within their companies to be responsible for handling nondisclosure letters and other materials related to the negotiation. Such an individual--a bookkeeper, a vice president, or even the president's office--should not only keep track of outgoing material, but should also field incoming letters.

If the tables turn

In this age of buying and selling, a small entrepreneur might be solicited for an investment, or be approached by someone who wants to buy his magazine. Even in a small company, someone may receive a nondisclosure letter and sign it without understanding what it means. An editor on one magazine may not know that a start-up is being considered by central management and, lacking experience in such matters, sign a letter agreeing that the concept in some way belongs to an outside party. Everyone in a publishing company should be sensitive to how important these letters are and refer them to the central source.

The central person must also be certain to get back all confidential materials given to outside companies. Every nondisclosure agreement should require recipients to return material if there is no further discussion between the parties, or when requested. Follow-through shows that you are, indeed, serious about confidentiality. If you say something should be confidential, and then don't make an effort to get it back, there could be some question as to how valuable it is to you. That could come back to haunt you. Moreover, a person can better take advantage of confidential information if it's still in his hands.

Dealing with the competition

The question of confidentiality becomes more acute when you are dealing with a competitor. No matter what is written in a nondisclosure letter, how is a person who is disclosing the guts of his company ever to know that the information won't be used against him if the deal doesn't go through? A more secure approach is to provide only nonconfidential information and then offer to include in any contract warranties with respect to any confidential matter--for example, that the paid circulation is no less than x, and that ad revenues are no less than y. Perhaps the best solution is to avoid direct competitors altogether. Usually, you are not willing to sell to a competitor unless you are in deep trouble and eager to get out.

But whether you approach your fiercest competitor or your warmest friend, don't make the mistake of that publisher who failed to use a nondisclosure letter and then woke up one morning to find his magazine had a new competitor--the guy from whom he was trying to get financing.

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