Preserving proprietary information is essential for both big and small companies in all sectors to stay competitive. There is a lot of information you should keep secret from rivals, including vital financial data and unique designs. To further your interests, you may occasionally need to reveal it, though. In these situations, the nondisclosure agreement (NDA) is the contract you use to protect your trade secrets as much as possible.
What are nondisclosure agreements?
A non-disclosure agreement (NDA) is a legally binding written agreement between two or more parties that stipulates that neither party will reveal any confidential information shared as a necessary part of conducting business.
Confidentiality agreements, proprietary information agreements, and secrecy agreements are other names for NDAs. Signatory parties undertake not to use or disclose proprietary and confidential information for purposes of conducting business outside of the terms of the agreement.
Types of nondisclosure agreements
Depending on who is disclosing private information, an individual must sign a different kind of NDA:
Unilateral NDAs:
The most popular choice is a unilateral NDA. When only one party will exchange protected information, they are employed. Think about relationships between employers and employees, investors and startups, or scenarios in which you plan to organise influencer content to expand your company. Under certain circumstances, confidential information such as financial particulars, business plans, merchandising schemes, trade secrets, shareholder data, and other critical operational data may come to light during routine work tasks, negotiations, or pitches. These agreements safeguard the sharing party by keeping its trade secrets out of the hands of unauthorised parties, giving it a competitive advantage.
Mutual NDAs:
In certain circumstances, like franchise agreements, corporate takeovers and mergers, and business sales, two parties may exchange confidential information. A mutual NDA, also known as a bilateral NDA, is necessary in these circumstances to guarantee adequate protection for each party. By signing mutual nondisclosure agreements (NDAs), both parties commit to upholding the terms of the agreement while trying to protect confidential information that may be revealed.
Multilateral NDAs:
Confidentiality is necessary in certain situations because they involve multiple parties and are extremely complex. A multilateral NDA is required in these situations to safeguard the private information of each party.
Why are nondisclosure agreements important?
Because they establish a legal framework to safeguard concepts and intellectual property, NDAs are essential.
Let’s take an example where a business has designed a new product, but it needs to collaborate with a manufacturer to produce the prototype and additional units. Without proprietary information, the manufacturer won’t know what to build. In this instance, an NDA can be used by the design firm to safeguard its data. It can share invention details because it is aware that if the manufacturer discloses any information regarding the design company’s invention, it has the legal right to sue.
What are the downsides of nondisclosure agreements?
Take into account the following potential drawbacks and risks prior to signing an NDA:
NDAs can be costly:
There are expenses involved with writing an NDA, such as legal fees. The good news is that you can use this general NDA to personalise other NDAs after you have the template.
NDAs may be accidentally violated:
Workers may inadvertently break the NDA because they do not fully comprehend its terms. In order to enforce the NDA in this case, there may be an unwelcome legal process and associated costs.
NDAs may stir mistrust:
Your staff may believe you don’t trust them if you make them sign an NDA as a condition of their job. This attitude may create a tense work atmosphere or spark questions about the NDA’s intentions.
NDAs may serve as a barrier to top talent:
Potential high-quality hires may be discouraged from joining your organisation by the restrictive nature of non-disclosure agreements (NDAs), which forbid employees from discussing work details, employment terms, and company culture. This level of secrecy may raise concerns for those who value openness and transparency in business practices.
What should you consider before requiring an NDA?
If you’re a business owner, think twice before making a client sign a nondisclosure agreement (NDA).
1. Pinpoint situations where you’ll need an NDA.
Each NDA ought to be customised for a particular partnership. Think about the following instances where it would be wise to consider an NDA:
Onboarding new employees and independent contractors:
Since new hires and contractors will probably be gaining access to sensitive company data, an NDA is almost always advised and usually required during the onboarding process. As part of their employment contract, require the employee to sign a non-disclosure agreement (NDA) as soon as possible. Any actions taken prior to the signing could lead to problems later on if the employee divulges private or sensitive information. Maintain the signed NDA in the personnel file of the employee.
Approaching investors or lenders:
Think about what your initial discussions will cover, what information is public or private, and how much private information you must reveal to spark interest when pitching your idea to investors or applying for business loans. Delay requesting an NDA if you can have initial discussions about publicly available and non-confidential information. Both parties should obtain and sign a nondisclosure agreement (NDA) as soon as talks touch on a company’s private business information, such as business accounting, marketing plans, an intellectual property portfolio, or specifics about services and goods.
Courting a new client:
At first, it might be advantageous to talk terms without an NDA so that you and your possible new client can use outside contacts to conduct due diligence. After a formal agreement is made, an NDA might be required in order to facilitate more open communication regarding the specifics of the project, the parties or issues involved, and any associated costs or fees.
2. Determine the information you must protect with NDAs.
NDAs differ, so you have to customise them to your unique business setup. If boilerplate agreements are broken, they usually don’t accomplish much because the parties will just quarrel over what information is and isn’t secret.
The following are the main areas that a standard NDA should cover:
Trade secrets and intellectual property:
Protecting a company’s trade secrets and intellectual property is crucial when working with new clients, private contractors, or employees. Customise the NDA to cover what you want to protect and what constitutes a breach if you’re introducing a new employee to the project or granting a client access to your product (particularly if you work in the software industry).
Marketing or financial information:
Emphasise the information that falls under these categories in an NDA if maintaining the privacy of your company’s financial information or marketing strategy is more important to you.
Product testing:
In order to safeguard and uphold the confidentiality of all communications pertaining to your business, include a feedback clause in the NDA if you permit clients to beta-test products and solicit feedback on their user experience or product recommendations.
What should you include in an NDA?
All parties involved should have a clear and comprehensive understanding of the scope and parameters of an NDA. Make sure your agreement has all the following components to ensure it is comprehensive and functional.
1. Include a description of confidential information in your NDA.
Provide precise details defining what information is considered confidential when drafting an NDA. Certain agreements may classify any information disclosed as confidential, but other agreements will only classify information as private if it is clearly marked or stated as such.
2. Include all parties’ requirements and obligations in your NDA.
Clearly define each party’s plan for handling the private information. For the recipient, this entails describing the steps they will take to protect the information, such as limiting unauthorised access and guaranteeing it won’t be exploited for private gain.
3. Include exclusions to the confidentiality agreement in your NDA.
Include any information in this section that you would prefer not to have the NDA cover. List information that has already been made public, common knowledge, and information that must be shared with third parties in order to conduct business as usual, for instance.
4. Include the duration of the NDA.
Indicate how long the confidentiality agreement will be in effect. Regardless of the length of the agreement—such as when a brand is preserving information about a pending product launch—it is crucial that all parties understand how long the NDA is in effect.
5. Include the consequences of an NDA breach.
Describe the steps that will be taken if there are any agreement violations. Restitution for damages, job loss, or the filing of a restraining order are a few possible remedies. If these remedies aren’t thought to be appropriate in the given circumstance, include a clause that permits alternative dispute resolution.
But, refrain from putting a monetary value on damages since you’ll be forced to pay for them throughout the legal process, which could hurt your case.
What should you do if a nondisclosure agreement is breached?
Unfortunately, depending on how much information is revealed, major harm may result if someone violates an NDA and divulges private company information.
Inform your company’s legal counsel as soon as you become aware of an NDA breach, and see if you can obtain a preliminary injunction or temporary restraining order to stop the release of more information.
After that, talk with legal counsel about the best course of action. This may involve requesting damages for contract breaches, theft, trespassing, copyright or patent infringement, misappropriation of trade secrets, conversion, and fiduciary duty breaches.
Since every employee, client, and potential investor is unique, approaching each situation differently calls for equal parts business strategy and legal consideration.
Never forget that signing an NDA does not equate to being in a restrictive situation. Rather, consider it a chance to join the group of people you can trust.
