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How to Negotiate and Structure NDAs in an M&A Deal

"If you can't negotiate an NDA, you probably won't be able to negotiate a 300-page closing binder." - Mark Khavkin

In this episode, Mark Khavkin, CFO at Pantheon Platform, explains how to negotiate and structure NDAs in an M&A deal. 

Mark talks about the fundamentals of NDA, how to negotiate, and what are the major risks that you need to watch out for. 

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Mark Khavkin

Episode Transcript

Text Version of the Interview

How to Negotiate an NDA?

The most crucial thing in negotiating an NDA is to remember that this is not a random piece of a legal lease that lawyers will talk about on the side. It's not just a checkmark that both companies need to go through and carry on by policy. 

This is a fundamental piece of the M&A process that fulfills two critical things. First, it establishes trust between the parties. It plays the framework for how the negotiation will carry on throughout the diligence. And then, if this gets to the closing documents, how the parties will work with each other.

  1. How will the commercial terms be discussed?
  2. How will the legal teams work with each other? 
  3. Who has the balance of power? 
  4. Who is flexible, and who is not? 
  5. Who has the power to make decisions?

So it sets the tone for the process.

The first decision both parties have to make is when to engage in the NDA process. And that's more of an art than science. My approach to this is, you want to go into the legal aspects of the transaction of the relationship-building phase as late as possible but no later. 

The art is to take the conversation in very general forms to a place where both parties are comfortable and convinced that there is a "there" and that it's worth getting into very strict legal constraints and taking on multi-year liabilities. And both parties need to take it seriously enough to get into the process. 

So my rule of thumb is, it's a sales process. Both parties are selling. One sells the best landing pad for the target, and the target sells itself, and it needs to be taken far away.

Now, everything that can be discovered through a number of GLG expert interviews should be discussed before the NDA. Anything that's on the sales pitch deck, any things that both companies can find out from talking to their respective clients, prospects, former exec, analysts out of the wild, or even the website.

All of this should be discussed before getting lawyers involved and more specific on some of the terms.

When to Use NDA?

To me, the red line is once you start getting into specifics of how the product works that is being acquired. When you start explaining what is exactly being done on the backend, or you're starting to get into details of your financial state. Or when you are starting to get into the details of engineers' actual backgrounds or key personnel.

Once you start getting into this territory, you want to put on paper the actual terms and liabilities and operational procedures that both parties will carry on to protect the information that they receive. 

But before that, it's all about building in mutually in this partnership that will last for many years. 

How to build that partnership?

If the disclosing party feels that you're on a fishing expedition, that relationship is just not going to work from the get-go. Everything in the future will be tainted by how you have approached the party in the first place.

So you need to get a sense of how the other party feels answering the questions you're posing, and it's good practice to offer an NDA before you ask anything further. 

You can gain the seller's trust faster this way by showing them that you want to protect them. These things build relationships and will have a positive impact on the deal.

You need to learn how to compromise because it is definitely part of building trust and will carry forward to the actual closing deal negotiations.

Who initiates the NDA?

It's typically the buyer, especially if the buyer is a much bigger company than the target. It's not always the case because in some cases, you have individuals being spun off; down the parent target is the bigger company with their own processes, obligations, and all of that. 

But in most of what I have seen, I've been on the buying side and we've proposed our own. 

Things to be negotiated

Neutral or one-way NDA

Some people prefer one-way NDAs. In my experience and my very firm belief, all NDAs should go two ways. The acquirer will disclose a lot of proprietary information, and the acquiring needs to be protected as well. 

So I think it's wrong to think that the only disclosing party is the target. As they go deeper in the process, the acquirer will be sharing a lot of information about its strategy, capabilities, and gaps. 

If the target is going through a process with several players in the same ecosystem, you want to ensure that this information isn't leaked to the other bidder.

And by the way, it doesn't have to be simultaneous. The target could be in the process with you this year and then for somebody else two years from now. Or a year and a half from now, and you don't want your strategy and your strategic thinking, let alone your numbers leaked to another party a year from now. 

So for the negotiations to be transparent and due diligence to be productive, the NDA has to go two ways. 


Three years is the standard; five years is sometimes on the page. I don't think it's reasonable or pragmatic, for that matter. Things change so quickly in technology. Keeping something safe for five years doesn't make any sense. 

But what should never be done is indefinite. Nobody should be assuming indefinite liability and indefinite operational obligation for any of the data that they receive.

What is Confidential Information

Clearly define what constitutes confidential information. Is it what's verbally disclosed? Is what's in writing, or just those explicitly marked confidential? Is it just the primary information?

For example, the target sends over a set of financial numbers, marks it confidential, everybody agrees that it's confidential, but then an analyst at the acquirer does some analysis puts together some ratios, and presents this to the executive team in a summarized form is confidential. 

What are you going to do with that particular analysis if the deal falls apart? Will you have to destroy it? Will you have to return it? Will you have faith to keep it? Like all of those things start to matter. 

These things have a low likelihood of being tested in court, but very high exposure of damage is proven in the court of law. So you may need to be careful on how to treat both those things. 

And then another one that's negotiated are non-solicits, non-hires, and all those things that you can and cannot do with the people you encounter in the process. 

Residual Memory

Lastly, this is the most interesting part of the agreement. Typically this refers to general frameworks and general skillsets. The general concept is that once you have seen something, it's very hard for you to unsee it as a human being. 

In ordinary life, think about it as learning to ride a bicycle. If the company manufactures bikes and you've never ridden a bicycle, but you want to try it out. You can learn the skillset; you learn to ride the bicycle. You cannot unlearn the skill of riding a bicycle.

The same could be said about intellectual endeavors. If you're trying to solve a problem, and then you learn a completely new approach, it's completely out-of-the-box thinking that the target company came up with; you can't possibly unlearn it. 

The residual memory stops being a general skillset and becomes confidential information that the NDA should cover. 

So back to our bicycle analogy, how do the gears work? How do the brakes work? Once you start talking about the actual implementation of this framework to solve the problem, that's no longer residual memory. That's very specific information that you have extracted as a company. 

The acquirer will always try to exclude the residual memory clause because it's impossible to forget about it, and there is no point in imposing restrictions. The target would always say that it is their secret sauce why they have been successful, and no one else should be using this other than them. 

Both statements have truth to them. This is where reasonable people can absolutely disagree.

And we need to look at every NDA with the lens of, what operational constraints and legal liabilities this imposes on us? In this case, the acquirer is talking to the target because they have a capability gap. If the transaction doesn't go through, they'll keep trying to solve this gap. 

So if you are a small acquirer, you can't possibly promise the target that whoever has been exposed to this due diligence will never work on solving this particular thing if the transaction doesn't go through. 

Suppose you're a big company and have three different engineering leaders or product leaders who could do that. In that case, you could assign the person who did the diligence to another problem and assign a replacement.

But what happens when the replacement leaves your company, and you are now forced to bring back the person who did the diligence to the problem that you're solving? 

You've just imposed unsolvable and completely unnecessary constraints on your organization. You need to avoid this. 

In my experience, if the acquire takes this NDA seriously and the target is being unreasonable, this is where the acquirer may walk away. This is probably the only place where I can see people walking away because it's tough to find a compromise.

The best compromise is residual, but only if the human does not make a deliberate attempt to memorize. And then you have to clearly define what a deliberate attempt to memorize is. 

What you remember in 12 hours is very different than what you remember in 12 months. You can't take notes; you can't record the sessions; you can't capture the code. You also can't come home and jot down what you remembered 12 hours ago. It's tough to get a compromise. 

Is it also the most important one?

It depends on your philosophy. If you think ideas at a high level are an essential thing in company execution, then yes.

The way to get around that is to say, "look, we understand the concept of the framework. How you solve the problem is extremely important, but at the end of the day, it's all about execution." 

Because if this is such a groundbreaking, earth-shattering discovery, then you should have filed a patent application. If you haven't filed the patent of application, then it's more about the execution.

But if you're putting the same weight on the execution compared to the idea itself, that's where the problem starts. Once you have the conversation going in the direction, the trust is not there.  

Things to Avoid in NDA

Don't do NDA's immaturely. Do not prioritize getting the document over the trust of the other party. What you don't want to do is you don't want to win the battle and lose the war.

At the end of the day, if both parties want to continue the diligence process, you have to ensure that there is trust between both parties and that they are well aware and have internalized what obligations they have taken on behalf of their company. 

This is also how you know the process has been successful. 

And it mustn't be just the lawyers are aligned. I feel the NDA process has been executed in parallel to the actual diligence process. So by the time diligence is done, the people who are doing the diligence have no idea what's in the document. But NDA's should impact how they carry on. 

The teams would be involved in crafting the NDA. At the very least, everyone should be informed in the briefing on the deal or on the due diligence. They should understand what and why the exceptions were made in this particular case. 

The other one that gets negotiated from time to time is the non-solicit and non-hires clauses. Courts have made the non-solicit, and it's much harder to enforce, and smaller companies are typically the ones who ask larger companies for that. 

Two things to remember. First, the operational complexity that could come out of this is just incredible. The target may ask your big company, the acquirer, to ensure that nobody from our small company gets solicited.

Both parties want to keep it confidential, but if the target is serious about this solicitation, the acquirer will need to broadcast the deal to the entire recruiting organization and immediately leak to the outside world. And that's entirely against the spirit of an NDA. 

Also, what if the employees of the target company reach out to the acquirer? How does the acquirer handle that?

The other nuance to remember is that it should also be mutual. The target will have all the incentives in the world to attract the person doing due diligence on behalf of the bigger company. So both parties take risks. The risks should be shared mutually.

However, the operational constraints on the bigger organization are significantly more potentially income cumbersome. 

How to Cover External Parties in an NDA?

Most of the time, the parties are defined as "Company A" and their representatives are covered by the same obligations. 

So as a larger company or a company that invites vendors to help with that, you need to make sure that your NDA is structured similarly, and they should follow the same rules as you are likely to promise to follow yourself.

Remember that if your third party leaks this information and breaches the contract, you're on the hook. So you will be responsible for your counterparty, and then you need to go after your third party to make sure that they indemnify you. But at the end of the day, you are responsible.

Can NDAs be a deal-breaker?

Operational constraints on how due diligence is done should never cause people to walk away. This is an opportunity to get creative with the process and figure out how the parties will work together in the subsequent few months of diligence.

How to make NDAs Successful?

You need to approach this from the point of view of - this is an exercise of being accommodating, being in the problem-solving mode, laying the foundation of how we will treat each other going forward. 

They're very few things in this agreement that should cause parties to walk away. All of it should be eminently solvable.

The residual memory may be one, in some circumstances, but this is the one where I've seen people being on the brink. Everything else should be imminently solvable. The complexity and the number of the issues discussed at NDA is a tiny fraction of what these companies will encounter as the deal moves forward.

So if you can't solve that and walk away, you just saved yourself six months of hard work. Because if you can't negotiate NDA, you probably won't be able to negotiate a 300-page closing binder. 


The best thing I've seen, to be honest, is an NDA with ten footnotes for internal use only.

Each footnote explains the term, the reason, and what their willing to do. There are also a set of suggested approaches if your counterparty feels a certain way. Then you have a residual memory clause, half a page but everything else is okay. 

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