Brad Feld

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Letter of Intent: Confidentiality / Non-Disclosure Agreement

Feb 07, 2006
Category Term Sheet

It’s been a while since Jason and I wrote an entry for our Letter of Intent series.  Yesterday, as I read through a confidentiality agreement that I had been asked to sign, I was inspired to address another typical part of an LOI – the dreaded confidentiality / non-disclosure agreement.

While venture capitalists will almost never sign these in the context of an investment, they are almost always mandatory in an M&A transaction. If the deal falls apart and ultimately doesn’t happen, both parties (the seller and the buyer) are left in a position where they have sensitive information regarding the other. Furthermore, it’s typically one of the only legally binding provisions in a LOI (along with choice of law and break up fees.) Everything else is dependent upon the deal closing. If the deal closes, this provision largely becomes irrelevant since – well – the buyer now owns the seller.

The good news is that both parties should be aligned in their desire to have a comprehensive and strong confidentiality agreement, as both parties benefit. If you are presented with a weak (or one-side) confidentiality agreement, it could mean that the acquirer is attempting to learn about your company through the due diligence process and may or may not be intent on closing the deal.

Generally a one-sided agreements makes no sense – this should be a term that both sides are willing to sign up to with the same standard.  Public companies are often very particular about the form of the confidentiality agreement. While we don’t recommend sellers just sign anything, if it’s bi-directional you are probably in a pretty safe position.