What is an NDA and when do you need one?
What is an NDA?
An NDA (non-disclosure agreement), or confidentiality agreement, is a contract that is usually concluded between two or more parties that are involved in discussions where commercially sensitive information is shared. The purpose of an NDA is to protect information that a party wishes to keep confidential, by requiring the other party to keep it secret, and to protect and use it only in accordance with what has been agreed in the NDA. It is usually, or at least should be, signed at an early stage, before any confidential information is disclosed.
As a business owner, it is important that you consider putting an NDA in place before discussing your ideas with anyone, whether it be a potential client, investor, or any other business partner, as this will act as a safeguard for your business, assuring that its unique aspects (this could be your innovative products, proprietary technology or strategic plans for example) remain confidential and inaccessible to the public. This is because at this stage you are only exchanging ideas, and you and the other party are not subject to any contractual obligations. As you haven’t signed a contract yet because you are simply exploring the possibility of a future deal with that other person, whether it be a company or an individual, there is no agreed set of rules that determines how either of you should behave. As there is no contract and no contractual obligation binding on either of you, you are at risk that the other party walks away and shares the information you have disclosed with other people, without having any recourse against them. There was nothing requiring that potential business partner to keep your information confidential and to use it only for the purpose of exploring your potential deal.
Not ideal, right? So what can you do about this?
That’s why NDAs are a helpful tool, as they serve as a remedy to the lack of contractual relationship between the parties at this stage. Whenever you are considering entering into talks with another business, a customer, or anyone else when you know that you will have to share information that you consider valuable to your business, you should require them to sign an NDA before your first meeting with them.
Ask yourself: “Will I be sharing any information which could harm my business if it were to be released to the public?”.
If the answer is yes, then you should definitely consider putting an NDA in place before doing so.
You can have a standard NDA that is ready-to-use for your business, and it is usually better to ensure that it fits your business interests properly and that it is appropriate for the type of information you share, the circumstances of the talks in question, and the level of protection you need.
NDAs are usually relatively short and straightforward (some people try to push for more sophisticated NDAs, it will usually depend on the risk level of the transaction), and making sure the one you use is suits your specific business needs is essential for it to be effective and useful.
How do NDAs work?
NDAs are a type of contract, and they outline the obligations of each party regarding the confidentiality of the information. They typically include details such as:
the specific type of information that is covered by the confidentiality obligations (you will want to make sure that the definition of confidential information covers the type of information which you want or need to be covered),
the duration of those confidentiality obligations (beware, you should not agree to be bound by confidentiality obligations which are indefinite in time), and
the circumstances under which disclosure may be permitted (usually only to the people who need to know the information in relation to the potential transaction).
I will discuss each of these points in further articles so you can make sure the NDAs you prepare and sign ensure the right level of protection for your business.
Are there different types of NDAs?
There are two common types of NDAs: mutual NDAs and one-sided (or unilateral) NDAs.
Mutual NDAs: both parties agree to keep each other's information confidential. Most obligations are reciprocal and ensure equal protection for both parties.
One-sided NDAs: one party agrees to protect the confidential information shared by the other party. Only one party’s information is protected.
Interesting thought:
In practice, very few NDAs are brought to court and enforced. They act as a strong deterrent and are usually considered very useful tools to prevent people from disclosing information. Think about this: if you knew you could be sued, and potentially ordered to pay damages if you were to disclose valuable information that belongs to someone else, would you actually do it? The act of signing a contract makes people act more responsibly, and this also makes you look more professional!
Do you need an NDA tailored to your business needs?
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