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Non-disclosure agreements (NDAs): How they work and why they’re important

Updated: October 28, 2022

By: Lillian Mirakhor

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Did you know that over one-third of employees are bound by some type of a written non-disclosure agreement (NDA) in the US? NDAs are one way for an employer to ensure that your trade secrets, company innovations, and sensitive projects don’t get shared outside of an organization — especially if your top talent gets recruited and hired by an industry competitor.

 

Though they can occasionally spark a little controversy, NDAs are fairly common throughout the business world and can be an effective way to protect intellectual property. Let’s take a closer look at why they’re used, how they work, and some of the most common types of NDAs.

What is a non-disclosure agreement (NDA) and it’s purpose?

A non-disclosure agreement (NDA), also known as a confidentiality agreement, is a legal document preventing an employee or independent contractor from disclosing confidential information to someone outside of an organization — most commonly in the form of client information, sales and marketing plans, unique processes or new product developments.

 

In addition to the examples mentioned above, confidential information can include trade secrets, plans for expansion, and customer databases. It’s generally any specific information that differentiates one business from another — which can be central to maintaining an advantage over direct and indirect competition.

 

Using an NDA helps ensure that your company’s private and proprietary information stays safe, and if anyone who signs an NDA wrongly discloses the covered information it can be grounds to take legal action. Violation of an NDA agreement can result in a variety of legal repercussions, including lawsuits, financial penalties, and, in some cases, criminal charges.

Did you know?

Even if an information breach from a current or former worker happens accidentally and is not intentional, NDAs can still offer some level of protection for your company.

If you’re considering using NDAs, many businesses include common features to make them easy for all parties to understand and to avoid ambiguity.

What information should be included in a non-disclosure agreement (NDA)?

Typically an NDA should consist of a few key elements:

 

Specific details outlining what is considered confidential information

  • Get rid of gray areas: The categories of information that are considered confidential should be clearly stated in an NDA. For example, in a doctor’s office, the NDA might state something like “confidential information includes patient background, health history, and financial and credit information.” This gives the signing party a clear definition of what information should remain confidential.

What is required of all parties involved

  • Avoid guesswork: The NDA should explicitly spell out the actions the individual receiving the information should take to ensure it remains safe (especially if you have employees entering into an NDA for the first time in their career). For example, in addition to requiring that they do not breach the contract, you may also require that they do not encourage others to do so. You might state explicitly that if information is disclosed as a result of negligence or miscommunication, you as the employer still have grounds to enforce the contract.

List how long the NDA lasts

  • Include a timeframe: An NDA should also include an effective time period that is clear to both the employee and employer. Most commonly, an NDA is effective for a number of years but can vary widely depending on industry and individual company circumstances.

 

It’s important to consider these factors — and do your best to cover all your bases — when asking others to sign an NDA. Businesses can occasionally run into trouble when trying to enforce an NDA that is too broad, so the more specific the terms are, the more likely it is to be enforceable, should you need to take action. If you have any hesitations, it’s strongly recommended you consult a legal professional before asking anyone to sign an NDA, as laws and regulations can vary from state-to-state.

 

Now that we’ve covered some of the standard information that’s generally included in NDAs, let’s look at a few common scenarios in which they’re used.

When should a business use a non-disclosure agreement (NDA)?

There are a few situations where NDAs are used most commonly within a business setting. Business owners often find themselves in a position where they have no choice but to discuss sensitive information with individuals from outside of their organization. For example, sharing information is unavoidable when seeking investments, hiring new employees, obtaining new clients, or working with potential partners on new business opportunities. In fact, there are even some cases when the law serves as a confidentiality agreement — like attorney-client privilege or doctor-patient confidentiality.

 

While this is by no means an exhaustive list, here are some common scenarios where NDAs tend to be used that you may come across.

 

New product or service developments

If your company sells or licenses a product or technology, an NDA can help to make sure that all of the data you’re disclosing — technical, financial, or other proprietary material — cannot be shared with third parties.

 

Existing employees or new hires

Because of the access to proprietary information, a confidentiality agreement can prevent your employees from sharing sensitive data while on the job or in cases when they take a role with another company that is a competitor.

 

New partnerships and investors

If you’re negotiating to bring on a new partner or investor, an NDA can ensure information shared during these talks is protected and kept confidential if agreements fall through.

 

Mergers and acquisitions

Often, when a business is being sold or acquired, sensitive financial and operations information must be shared with various parties involved in the deal. In such cases, it’s not unusual to have an NDA in place to ensure that your company’s sensitive data remains protected.

 

While these are some of the most common uses for an NDA, not all confidentiality agreements are one-size-fits-all. Let’s touch on the different types.

What are the different types of non-disclosure agreements (NDAs)?

There are two types of NDAs that are fairly standard: unilateral and mutual agreements.

 

Unilateral NDA

A unilateral NDA applies only to the party receiving the information — such as an employee — who agrees not to reveal any sensitive information. An example would be an employment contract, in which the new hire signs an NDA, agreeing not to disclose proprietary information learned on the job to a third party. Most NDAs tend to fall under this category.

 

Mutual NDA

A mutual NDA holds both parties responsible and is most commonly used between businesses working on a joint venture in which they both have confidential information that needs to be protected. For example, if one company merges or acquires another, a mutual NDA ensures that none of the parties involved share confidential information during the process.

Bottom line: NDAs have a time and place

When the protection of certain information could be something that is crucial to the success of your business, an NDA is a great option to consider. These contracts can provide you with the reassurance needed to be confident that your company’s new developments, innovative marketing strategies, client information, or anything confidential remains protected.

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Lillian Mirakhor is a Senior Marketing Associate at OnPay. Since graduating from the University of Georgia, she’s worked with small businesses in the tech and SaaS industries helping them boost their marketing efforts.