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December 21, 2023

Importance Of Confidentiality Agreements In Start-up Law

INTRODUCTION AND CHARACTERISTICS OF START-UPS

As it is known, the concept of “Start-Up” is a very popular concept today and aims to contribute to the development of comprehensive solutions, ideas, products, or services to short and long-term problems by utilizing technological opportunities. In this sense, start-ups can generally be defined as “a structure created to find a scalable and renewable/repeatable business model”. Start-ups form an inclusive structure by including the concepts of entrepreneur, investor, employees and technology, and they start with the entrepreneur’s idea through the use of technology and continue their existence through the investors’ interest and trust in the idea, and through the employees, they employ for the continuity of the start-up. Therefore, all these elements are crucial for start-ups’ survival and essentially enable start-ups to realize their ultimate goal.

In this context, the investment and financing element, which is important for start-ups to realize their goals, is tried to be provided through various means such as KOSGEB and TÜBİTAK funds, micro-credits, venture capital companies, funds from angel investors, crowdfunding, and the provision of start-up financing in the desired way is based on the establishment of a trust relationship between the investor and the entrepreneur, thus the establishment of this trust relationship is based primarily on the commercial trust of the parties to each other, and then on the content and binding power of the legal contracts to which the parties are bound. Start-ups should therefore examine in detail the contracts they are willing to sign in terms of any legal relationship they will enter into, negotiate with the other party where necessary, and sign confidentiality agreements, especially to ensure that the products or ideas they will create remain confidential.

As a matter of fact, the confidentiality agreement to be signed between the parties will provide the following: not to disclose the confidential information obtained regarding the idea and/or product, which can be a trade secret in terms of Start-up, to persons who are not parties to the legal relationship, to ensure that the confidential information obtained is protected for the duration of the contract or a certain period after the termination of the contract by taking the necessary measures, and to regulate how and under what conditions this confidential information can be used.

At this point, although confidentiality agreements are generally regulated as standard contract types/terms, it is important to evaluate each contract/contract term to be signed/accepted separately. Signing these agreements/contract terms with the motive that these agreements/contract terms are always standard may cause undesirable consequences for the parties.  


SCOPE OF CONFIDENTIALITY AGREEMENTS/TERMS

As we have explained in the first section, confidentiality agreements/terms are very important for start-ups in terms of protecting ideas and products. This is mostly because the signing of a confidentiality agreement ensures the protection of confidential information related to the project or shared business subject by preventing the disclosure of trade secrets and information that is important for the continuation of the initiative to third parties without the consent of those concerned. At this point, when signing confidentiality agreements and/or in cases where confidentiality provisions are desired to be added within the signed agreement;

  • What information and how does the definition of “Confidential Information” cover and what are the exceptions to this definition,
  • A deterrent penalty to be imposed in case of breach of the contract or provision,
  • Under which circumstances and in what manner Confidential Information may be disclosed,
  • How Confidential Information should be protected

should be stated clearly and in detail. The confidentiality benefit regarding the idea and/or product that the parties expect from the contract or the provision will not be achieved as a result of contracts or provisions whose scope is not clearly determined and from which stage the information transferred will be deemed confidential. Therefore, in such cases, information that is a trade secret for the parties may fall into the hands of third parties and the entrepreneur will not be able to obtain the efficiency he/she expects from his/her project.

 When defining Confidential Information, the scope of the definition should be regulated to cover all kinds of financial, legal, commercial information, contracts, business plans and policies that the parties communicate to each other verbally, in writing, electronically or by any other means. However, it is necessary to be selective in regulating the scope of the definition and exclude non-essential matters from the scope of the definition. As a matter of fact, information that unnecessarily expands the definition in this way may cause disputes between the parties and may prevent the expected benefit from the contract/term.

Following the comprehensive definition as stated above, circumstances that constitute an exception to this scope should be identified. Examples of these circumstances are:

  • Information that is already known to the public at the time of disclosure
  • Information that becomes public at a future date without breach of the terms of the contract or culpable conduct by the relevant party
  • Information that can be proven to have been in the possession of the recipient of the information before the confidential information was shared with the recipient and that it was acquired without any commitment to confidentiality
  • Information that is required to be disclosed under applicable laws or regulations or a court decision or administrative order and obtained without any restriction from a third party who has no confidentiality obligation

Including a deterrent penalty clause in the contract is important t after determining the definition and exceptions regarding Confidential Information. This is because with the penalty clause to be imposed, the parties will be able to request compensation for the damage that may arise in case of breach of the confidentiality obligation, which is very difficult to determine, over a certain amount, and in this way, at least a reasonable part of the damage, which is very difficult to determine, can be covered.

Another important point is the need to regulate the conditions under which confidential information can be disclosed within the contract. An example of this point is the obligation of one of the parties to disclose the confidential information held by one of the parties as a result of a warrant written within the scope of the judicial order. In such cases, the provisions for informing the other party of the contract must be included in the contract so that a road map can be drawn according to the information to be disclosed.

Finally, it is necessary to regulate in detail how and for how long confidential information will be protected. For example, the parties can widen the circle of protection of confidential information and ensure its more secure protection by adding provisions stating that the obligation to retain confidential information will continue for 5 (five) or 10 (ten) years from the end of the contract or that confidential information should only be stored and shared through a system to which the parties have common access.

IN CONCLUSION

Especially for start-ups, it is very important to sign and add confidentiality agreements/provisions to the text at the presentation and negotiation stage to protect their products or ideas, to prevent large companies from accessing these products and ideas without their permission and benefiting from them, to determine the duration and form limits of this protection, to prevent potential damages that may arise in case of unfair acquisition of confidential information, and to ensure that the parties can properly provide the benefit they expect from the legal relationship they have entered into. If such considerations are ignored, the parties may first and foremost suffer losses and will not be able to obtain the benefits they had planned to obtain from their ideas or products that they have spent a long time and effort on. 

 

Authors

Batu Uslu

Batu Uslu

Lawyer