Non-disclosure agreements (NDAs) are legally binding contracts that create a confidential information relationship.

The parties involved agree that any sensitive information they obtain will not be disclosed to anyone else. A confidentiality agreement may also be called an NDA.

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Takeaways:

  • An NDA is a contract that acknowledges a confidential relationship between two parties or more and protects the information from being disclosed to others.
  • Before any discussions between companies about possible joint ventures, the NDA is standard.
  • To protect confidential business information, employers often require employees to sign NDAs.
  • A confidentiality agreement may also be called an NDA.
  • Two types of nondisclosure agreements can be used: mutual and nonmutual.

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What is an NDA?

A non-disclosure agreement is legally binding contract which create a confidential relation between a person with sensitive information and the person who will have access to that information. Confidential relationships are those in which one or both of the parties have a duty to keep that information confidential.

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Non-disclosure agreements can also be called confidentiality agreement , non-disclosure contract, or confidentiality disclosure agreement . NDAs are common at the start of a business relationship or during large financial transactions.

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An NDA is a contract that protects an individual or organization’s privacy. It differs from other business agreements like service contracts or sales agreements, which focus only on the terms and condition of services or transactions.

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NDA Limitations

Confidentiality agreements do not protect all information. These confidentiality agreements do not cover public records such as SEC filings and company addresses. A court can interpret an NDA’s scope in ways that may surprise one or more of the participants.

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The NDA will not apply if the NDA’s information is disclosed in a different way, such as through a court proceeding.

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Without a standard language, managing multiple NDAs quickly becomes difficult for an organization. It can be extremely time-consuming and difficult to review, negotiate, and conclude unique contracts manually when the number of NDAs exceeds 100. This issue can be addressed by a standard, flexible confidentiality agreement.

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However, it is up to the organization to take the time or work with experts in order create a standard NDA that suits all its requirements.

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Understanding Non-Disclosure Agreements

An NDA is used in a range of situations. When two companies are discussing doing business together, and want to protect their interests and details of any possible deal, NDAs will be required. The NDA prohibits any information about the business process or plans of the other party.

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Certain companies require new employees to sign an NDA if they have access to sensitive information about the company. Some companies require all employees to sign the agreement. Others will only allow certain types or departments to sign it.

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A NDA may be used to prevent potential investors from seeing a company’s financial information. The NDA is used to protect trade secrets and business plans. NDAs are not something that many investors would be willing to sign.

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This will not only prevent them from sourcing new deals with other companies, but it may also make it difficult for them to enforce the agreement and prove wrongdoing. Most investors won’t sign a legal agreement if they don’t want to be bound by it.

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All of these information may be protected, including a sales strategy, potential customers, a manufacturing procedure, or proprietary software. The other party can seek court action against the violator of an NDA to stop further disclosures. They may also sue the violator for monetary damages.

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Types of Non-Disclosure Agreements

The Mutual Agreement

Two businesses may be discussing the possibility to partner together. Each company might disclose details about its operations as part of strategic discussions to better inform the other. Both sides often agree not to disclose sensitive information in such agreements.

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The Non-Mutual Agreement

If employees have sensitive information about the company, this type of agreement is usually applicable to them. The former employee is the only person who is prohibited from disclosing confidential information. Also known as a unilaterial NDA (unilateral confidentiality agreement), only one party is required to keep confidential information private because they are the only ones receiving sensitive information.

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The Disclosure Agreement

Individuals are increasingly being asked to sign an agreement that is not a non-disclosure. A doctor might ask a patient to sign an agreement stating that their medical information may be shared with insurance. This gives one party the power to share personal information without being sued.

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An NDA requires certain requirements

NDAs can be tailored to suit any situation. There are six elements that are generally essential to any nondisclosure agreement.

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Participants in the Agreement

Each non-disclosure agreement must clearly identify who each party is. The individual who receives the sensitive information may be an individual, employees of another company or a representative of the company.

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However, it is important that a company properly defines itself in an NDA. Consider companies with complicated legal structures, for example. The company must determine who owns the information. In many cases, a company can simply list any legal entity that falls under its broad ownership umbrella.

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Definition of Confidential Information

An NDA is often one of the most difficult to define. It must clearly state what information is confidential. An NDA cannot be assumed that all will understand proprietary information. It is up to the company to determine what information should not be shared.

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It is difficult to define confidential information. This is because the NDA does not allow for disclosure of such information. Companies may assign confidentiality to large groups. The company might decide that information concerning its research department is confidential.

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Confidentiality Exclusions

It may be easier to identify what information is confidential in certain situations. These agreements state that any information that is shared with an outside party must be kept confidential, except for certain items that the company has determined. These agreements are designed to prevent any exceptions from being overlooked.

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Uses of information that are appropriate

Sometimes, a company might state that all information is confidential. It may limit the use of the information by the external party. A company might be allowed to disclose its operating procedures to another party. The information cannot be shared with a competitor, or duplicated for financial gain.

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Time Period

Many proprietary information, especially in relation to research and development can simply become less valuable or lose its value over time. Take Apple iOS in its early days. Many components of the operating system were not known and the technology was unknown to the masses.

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Many of this information can be replicated or used to create newer technologies today. Companies often specify when information that was once confidential is no longer secure.

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Other/Miscellaneous Provisions

NDAs can be tailored to meet any specific need, as we mentioned previously. Different industries might have different requirements. Government agencies may have stricter requirements for keeping sensitive information private.

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An NDA can also include information about applicable state laws or laws that are relevant to the agreement, and who pays attorney fees in case of dispute. If the agreement party fails to adhere to the terms, this document may outline the next steps.

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NDA protects information

Companies have many options to protect themselves using NDA. NDAs can be used to protect information, including but not restricted to:

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  • Customer information. This information includes customer preferences, major customers, contact information for major customers and major customers. This could also include direct communications with customers.
  • Financial information. This includes financial information that is specific to a customer, or financial information that is not required to publicly be disclosed. These types of information are often more closely related to cost accounting information than financial accounting information.
  • Intellectual property. This includes patents and copyrights, trade secret, technologies, and any other information that a company uses to gain a competitive edge.
  • Marketing information. This information includes billing policies, pricing strategies and advertising methods.
  • Operational information.ย This information includes information about employees, suppliers, and any other information that is not required to be made public

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Exclusions from NDAs

NDAs cannot contain specific pieces of information if they don’t cover information that is already known or in the public domain. This includes information that is widely known or considered to be public knowledge. However, there might be discrepancies in how it is defined. Information that is made public by the NDA recipient is also included.

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The agreement cannot contain information that the NDA receiver already knows about before the agreement was received. Information that can be independently researched or obtained legally from a third party cannot be considered confidential.

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Advantages and disadvantages of an NDA

An NDA protects sensitive information about your company. This could include research and development (R&D), future patents and finances. Negotiations and other information are also possible. An NDA is an agreement that protects private information from being made public.

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NDA agreements are also very clear. To avoid confusion, they clearly state what can and cannot be disclosed. Because they are essentially a piece of paper, NDAs can be easily created for a very low price. This is the best way to keep private information private.

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NDAs outline the consequences for disclosing party prohibited information. This should help prevent leaks. NDAs can also be used to preserve trust and comfort in a relationship.

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An NDA agreement has one major drawback: it can create mistrust in a relationship. This can set the tone for the relationship, and it may not always be positive. Top-tier talent may not be able to join your company if they aren’t allowed to discuss their future jobs.

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Asking employees to sign NDAs for special projects could also hurt their work experience. They may feel less trusted. If NDAs are not signed, it can lead to potential lawsuits which could be a problem for all parties.

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Pros

  • Information kept private
  • Clarity about what information can be and cannot shared
  • It is easy to create at a low cost
  • Outlines consequences

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Cons

  • Can it create an environment of distrust?
  • High-quality talent may be discouraged from joining the firm
  • Could this cause a rift with your current employees?

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Example of an NDA

Apple has been ranked as one of the top private companies in the world. The company guards its future products and technology until it is ready to be released. This is done to prevent competitors from copying its products trade secrets, as the company has been a pioneer of technology for most its life. It also generates buzz as a marketing tactic.

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CNBC reported that Hyundai, a carmaker, confirmed that it was in talks to Apple about cars in a Jan. 2021 article. 2 This raised suspicions that Apple might be entering the market for automobiles or developing a product that is related to them. Hyundai released a follow up statement, which removed all mention of Apple.

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Apple insists that all its relationships are kept secret and requires partners to sign NDAs. Apple insists on secrecy in all of its relationships and makes any partner sign NDAs.

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What happens if you break a non-disclosure agreement?

You will face the consequences of breaking an NDA. While breaking an NDA isn’t considered a crime it could be, depending on the nature of the violation, it could be considered a crime. A person can be sued if they violate an NDA. This could result in a monetary penalty, termination of employment or the return an asset.

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What is the lifespan of an NDA?

Each NDA is unique and will last for a different time. The typical timeframe for NDAs is between one and 10 years. However, it may last indefinitely depending on what information is being kept confidential.

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What is the cost of an NDA?

The complexity of the agreement can affect the cost of an NDA. It is possible to create an NDA for as little as $175.

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What is an NDA template?

An NDA template can create a non-disclosure agreement between individuals or companies. This template contains the basic legal information and blanks that can all be filled out to create an NDA between two or three parties that are relevant to their relationship.

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You can easily find NDA templates online by doing an Internet search. Many sites offer NDA templates.

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What happens if you violate an NDA?

The other party could sue you for an NDA if you breach it. You could also be sued for intellectual property rights violations, such as copyright infringement or breach of fiduciary obligation. A court can impose financial damages and other legal costs. A court may impose financial damages and associated legal costs if an NDA is required for employment.

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Bottom line

Non-disclosure agreements can be created quickly and cost-effectively between two or more people. They are legally binding and protect private information. Individuals and organizations use these agreements to protect their personal and business information. They also allow businesses to collaborate without fear of losing private information to competitors.

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It is crucial to be as specific as possible when drafting an NDA. This will ensure that all parties know what information can be shared and the consequences for leaking.

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To learn more about other terms commonly used in venture capital,ย check out our complete VC Glossary.

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