What is a Non-Disclosure Agreement (NDA)?

Kim Porter

As a business owner, you’ve probably accrued trade secrets over time. Maybe you’ve developed the next big product, a rock-solid content marketing strategy, or a private client list. 

You don’t want anyone giving those confidential details to your competitors, but how do you protect that information? 

Enter the nondisclosure agreement (or NDA). This legally binding contract allows you to share sensitive information with your employees, outside contractors, and others without fearing it will end up in the wrong hands. If anyone breaches that NDA, you’ll have legal recourse. Here’s what to know about nondisclosure agreements before setting them up.      

What’s an NDA?

A nondisclosure agreement (NDA) is a legal contract that creates a confidential agreement between two parties. NDAs are also known as confidential disclosure agreements, proprietary information agreements, and secrecy agreements. Companies commonly use these contracts to protect their client details, trade secrets, and other proprietary information from being shared with others. The people who sign the NDA agree to not disclose certain information to anyone else. 

You might be wondering, “How does this apply to my business?” Here’s an example: Let’s say your company develops a new dating app and needs to hire a consultant to help you advertise it. You might need to discuss lots of details about that app, like the costs involved and the algorithms you used. To keep that consultant from handing over your trade secrets to a competitor, you might ask them to sign an NDA. 

There are two main types of nondisclosure agreements: 

  • Unilateral NDAs are used when only one party shares confidential information. For instance, a company might use a unilateral NDA before divulging confidential information to an outside contractor. 
  • Mutual NDAs are used when each side shares confidential information. Two partners who want to go into business together, for example, might sign a mutual NDA before discussing their partnership details.

In this article, we focus on unilateral NDAs that are relevant to employers or business owners.

Who should use an NDA?

As a business owner, a signed NDA can help you avoid a lot of headaches. Without a confidentiality agreement in place, anyone who works closely with your business could use your confidential information for their own gain—or share it publicly. 

Every employer will need to decide whether to use a nondisclosure agreement, but here’s a good rule of thumb:

You should use an NDA if you share business information with anyone—such as employees and outside contractors—that you don’t want passed on to others. The information could include details about your processes, clients, development plans, and other strategic moves. Even if you don’t think you have “trade secrets,” keeping your business information protected can help you maintain a competitive edge. 

Keep in mind, it can be difficult to keep everything truly private if you’re sharing unique business details with a lot of people. But by using a legally binding document, you’ll have recourse if any of your confidants share proprietary information. 

Here are some common examples of people you might ask to sign a nondisclosure agreement:

Your employees

Some companies require employees to sign a nondisclosure agreement if they handle proprietary company information. These agreements vary with every industry, employer, and the specific intellectual property that’s being protected. NDAs for employees usually also claim company ownership of anything that an employee produces while they’re on the clock. 

The NDA is legally binding as long as the employee receives something in return for signing the NDA—in this case, employment—and if the contract protects information that’s both confidential and valuable. NDAs usually remain in effect for the duration of the worker’s employment and for a period of time after they leave your company.

Candidates for senior-level positions

When you’re holding interviews for upper management positions, you might need to discuss details about your business strategy or upcoming plans. An NDA allows you to discuss company information freely without worrying about the candidate divulging details to someone else. Discussing business details openly makes it easier to figure out whether the candidate is a good fit for the job.

Outside consultants, contractors, and vendors

Your company might also need to hire outside contractors to perform certain tasks for your business. Because different contractors perform different jobs—for example, accounting, content writing, cleaning, or web designing—the agreement doesn’t necessarily need to spell out what is (and isn’t) secret. Instead, you can decide that you’ll broadly label certain materials as confidential.

You’ll also need to consistently treat the information as confidential. One way to do this is to use the same nondisclosure agreement with all contractors who are exposed to the same information.

Prospective investors or buyers

If you ever decide to bring on investors or entertain acquisition offers, you’ll need to produce a lot of financial and operations information. Anyone who’s reviewing that confidential company information should sign a nondisclosure agreement. 

What can and can’t be included in an NDA? 

Generally, NDAs shouldn’t be so broad that they break rules meant to protect employees and other parties. For instance, NDAs can’t silence employees who were harassed or prevent workers from discussing their wage details and employment conditions with other employees. Employees also typically have the right to disclose confidential information if they’re talking with federal enforcement agencies such as the Equal Employment Opportunity Commission, the Securities and Exchange Commission, or other state anti-discrimination agencies.

Every state has its own laws on what you can and can’t include in a nondisclosure agreement, too. If you’re interested in creating your own NDA, be sure you talk with a contract lawyer who’s well-versed in this area. They can help you create a solid NDA that follows federal, state, and local NDA rules. 

When should I ask an employee or contractor to sign an NDA?

Business owners who decide to use NDAs should ask employees to sign these contracts at the time of hire. That’s because in some states, you can’t ask existing employees to sign a new agreement without additional consideration, such as a raise or bonus. If you plan to hire contractors, consultants, and vendors, ask them to sign NDAs before they start work.

Do NDAs expire?

NDAs are usually valid as long as the confidential information is considered useful. That can mean a lot of things, and it partly depends on the nature of the confidential information. A short time frame, such as one year, may be legally enforceable for a new product you’re about to roll out. But some information, like trade secrets, may be kept confidential indefinitely. And a general employee NDA might be legally binding while the employee works for you and for a certain time frame after they leave your company.  

What happens when an NDA is broken?

A nondisclosure agreement lets you take legal action if the contract is violated. If you think someone has broken an NDA, go through your agreement with a lawyer to figure out the best course of action. You may need to bring the person to court and ask them to pay financial damages and related legal costs. You can also usually terminate the employee or end their contract if they worked for you. 

Kim Porter Kim Porter covers personal finance topics for AARP The Magazine, Bankrate, U.S. News & World Report, Reviewed, Credit Karma, and more. When she’s not writing, you can find her training for her next race, reading, or planning her next big trip. Twitter | LinkedIn
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