What is a residuals clause?
A residuals clause allows someone to use information despite confidentiality restrictions that would otherwise apply to the information. They appear in many forms, sometimes benefitting only one company and other times benefitting both companies. “Residuals” are usually defined as information that is unintentionally remembered by someone in their unaided memory.
As an example, if a startup employee reads an internal document belonging to a customer, then returns it to the customer, and later remembers some of the information without having taken any notes, made any attempt to remember the information, or made any copies, that remembered information is considered a “residual”. If the NDA between the companies includes a residuals clause, the startup employee can use and disclose these residuals even though they are based on the confidential information that was disclosed under the NDA.
Why would a potential investor need to use residual information?
Investors meet a lot of companies, some of whom require NDAs in place before disclosing information about their business. During the course of these meetings, an investor might learn confidential information that goes on to inform their perspective on the market more generally. Including a residuals clause in the NDAs they sign gives the investor some latitude to discuss a market generally without fear that sharing their insights will be seen as disclosing confidential information.
Sample langauge
Allow a potential investor to use residual information
Add at the end of Section 3: { COMPANY } (“Company”) acknowledges that { INVESTOR }’s (“Investor”) review of Company Confidential Information may enhance Investor’s knowledge and understanding of Company’s industry in a way that cannot be separated from Investor’s general knowledge. Company agrees that this NDA will not restrict Investor’s use of Residuals for the purchase, sale, consideration of, or decisions on investing in or serving on the board of other companies in the same industry, so long as Investor complies with its other obligations under this NDA. “Residuals” means information in non‑tangible form that is unintentionally remembered by an individual in their unaided memory and without reference to the Confidential Information.
Written to work with the Common Paper standard Mutual NDA.