In business, there are numerous instances in which you may want to share confidential information with another party. But the key to doing so safely is making sure that the other party is bound to respect the confidential information you provide them and not use it to your detriment.
One common way to protect the secrecy of confidential information given to another party is through the use of a Non-Disclosure Agreement, which is sometimes also referred to as a “Confidentiality Agreement” or “NDA.”
In this article, I will explain when it makes sense to have a Non-Disclosure Agreement as well as the key terms that agreement must include.
When Does a Non-Disclosure Agreement Make Sense?
When does it make sense to require another party to sign a Non-Disclosure Agreement? There are probably many instances where it may be appropriate. But the principal situations are those in which you wish to convey something valuable about your business or idea, but still want to ensure that the other side doesn’t steal the information or use it without your approval.
Here are some typical situations where you may want to use a Non-Disclosure Agreement:
- Presenting an invention or business idea to a potential partner, investor, or distributor
- Sharing financial, marketing, and other information with a prospective buyer of your business
- Showing a new product or technology to a prospective buyer or licensee
- Receiving services from a company or individual who may have access to some sensitive information in providing those services
- Allowing employees access to confidential and proprietary information of your business during the course of their job
Non-Disclosure Agreements probably don’t make sense for start-ups trying to raise funding from venture capital investors, as most venture capitalists will refuse to sign such agreements.
Mutual vs. Non-Mutual NDAs
Non-Disclosure Agreements come in two basic formats: a mutual agreement or a one-sided agreement. The one-sided agreement is when you are contemplating that only one side will be sharing confidential information with the other side. The mutual NDA form is for situations where each side may potentially share confidential information.
Although there is always some appeal to using a mutual form of NDA, I really shy away from the mutual form if I’m not planning to receive confidential information from the other side. One way to decide this early on is to let the other side know that you don’t want to receive any of their confidential information, so you don’t see the need for a mutual form if they ask for one.
Sample forms of NDAs can be found the Forms and Agreements section of AllBusiness.com.
The Key Elements of Non-Disclosure Agreements
Non-Disclosure Agreements don’t have to be long and complicated. In fact, the good ones usually don’t run more than a few pages long.
The key elements of Non-Disclosure Agreements:
- Identification of the parties
- Definition of what is deemed to be confidential
- The scope of the confidentiality obligation by the receiving party
- The exclusions from confidential treatment
- The term of the agreement
The Parties to the Agreement
The parties to the agreement are usually a straightforward description set forth at the beginning of the contract. If it’s an agreement where only one side is providing confidential information, then the disclosing party can be referred to as the disclosing party and the recipient of the information can simply be referred to as the recipient.