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What is an NDA? How Non-Disclosure Agreements Work

November 3, 2020 5 min read

For many organizations, the protection of trade secrets and other confidential information is a top priority. Whether it’s unique manufacturing processes, new product information, sales and marketing plans, or even your client roster, a Non-Disclosure Agreement (NDA) ensures your sensitive data remains safe and secure. 

Sometimes called “confidentiality agreements,” NDAs protect the sanctity of trade secrets, and it’s this protection that allows businesses to collaborate on projects, seek out investors, and even tap into the top talent in their industry. 

What’s a Non-Disclosure Agreement?

NDAs are legally enforceable contracts that create a “confidential relationship” between the person who has the information and the person who will gain access to that information. By signing an NDA, one or both parties agree not to share that sensitive information. 

Whenever confidential information is shared – be it to creditors, clients, investors or even employees – an NDA is necessary. Information protected by an NDA can include everything from product specs to client rosters. Business models, test results and even embargoed press releases or product reviews can all be covered by an NDA. 

An NDA creates the legal framework that allows for sharing ideas and information without the risk that those ideas will be stolen or shared with competitors or third-parties. Breaking an NDA agreement triggers a host of legal ramifications, including lawsuits, financial penalties, and even criminal charges. NDAs offer a level of protection where even accidental breaches are covered. 

The purpose of a Non-Disclosure Agreement

There are three essential functions of an NDA:

  1. Protecting sensitive information: Signing an NDA creates a legal obligation to keep sensitive information confidential, and any leak of that information is a breach of contract. 
  2. Protecting patent rights: Because public disclosure of a pending invasion can sometimes void patent rights, an NDA can protect an inventor as they develop their new product or concept. 
  3. Identifying protected information: By drawing a line between what information is confidential and what can be shared, NDAs classify information, allowing parties to work freely within the boundaries created by the confidentiality agreement. 

When do I need an NDA?

Whether it’s looking for investors, hiring new employees, or seeking new partners or collaborators, companies will often reach a point in the process where, to continue, sensitive information must be shared with individuals or entities outside the organization. For those “next step” actions, an NDA is crucial to ensuring that your company can move forward safely. Mitigating the risk of sharing information will allow all parties to act confidently, knowing that the ideas and secrets shared are protected. 

So when do you need an NDA? Below are five situations that trigger the need for a confidentiality agreement.

  1. Products: Whenever your organization is entering into the sale or licensing of a product or technology, you need to ensure that all the data you’re disclosing – technical or financial or other proprietary material – cannot be shared with third parties.
  2. Employees: Because of their access to confidential and proprietary information, you need to ensure your employees cannot share your organization’s sensitive data while on the job or once they leave.
  3. Partners: During negotiations with a new partner or investor, you need to ensure the information shared during these talks is protected.
  4. New clients: When onboarding a new client, your organization may become privy to that company’s sensitive information. An NDA can protect your organization by identifying which information cannot be shared so that there is no accidental exposure to legal liability.
  5. Mergers and Acquisitions: When selling your business, sensitive financial and operations information must be shared not just with the entity that’s buying your business, but with intermediaries and brokers as well. An NDA ensures that data is protected.

Mutual NDA vs. Unilateral NDA

While each NDA’s content and reach are unique, any NDA’s primary goal is to protect sensitive information and hold parties who breach that trust legally accountable. Generally speaking, NDAs fall into two main categories: unilateral and mutual. In a unilateral NDA, one party agrees not to reveal confidential information. 

On the other hand, in a mutual NDA, both sides agree that they will not share confidential information. While the number of parties forbidden from revealing sensitive data is governed by the type of NDA being used, in all other aspects, these two types of agreements are identical, especially when it comes to enforcement and the consequences of a breach. 

An employment contract is an excellent example of a unilateral NDA. When an employee is hired, they sign a unilateral NDA agreeing not to share information learned on the job. If one company is merging or acquiring another company, a mutual NDA ensures none of the parties participating in the process divulge confidential information. 

When drafting your confidentiality agreement, here are a few questions that will determine whether you need a unilateral or mutual NDA:

  • Business type: Does the activity involve a mutual exchange of information or multiple actors (e.g., mergers and acquisitions, joint ventures, teaming agreements)? 
  • Reciprocity: Are both sides equally protected and obligated so that neither is unfairly “favored” by the agreement? 
  • Number of parties: Are there more than two parties participating, or is each participating party providing information?

The NDA framework

Whether unilateral or mutual, all NDAs should include three specific elements: definitions, obligations and time-frame. All three aspects identify what is protected, how it must be protected, and for how long the protection lasts. Specifically, each component of an NDA operates as follows:

  • Definitions: This section of the NDA lays out the different types of information covered by the agreement and establishes rules regarding how it is handled. Exclusions identify the kind of information that can be shared, like any commonly known data or data collected before the NDA is signed.
  • Obligations: What happens if protected information is shared? An NDA not only sets out the specific behavior expected from each signatory, but it also lays out the consequences of breaching the agreement. 
  • Timeframe: Most NDAs don’t last forever, and many confidentiality agreements explicitly state the number of years that sensitive information must be kept secret. Even those with an indefinite time-frame will often indicate when information is no longer protected by the agreement. 

The limitations of an NDA

Of course, not all information is protected by an NDA. Public records, including SEC filings or company addresses, are not covered by NDAs. The courts can also interpret the scope of an NDA in ways that one or more participants may not have initially expected. If the information covered in an NDA is revealed in another way — e.g., through a court proceeding or subpoena — then the NDA no longer applies. 

NDAs are fundamental to modern innovation

NDAs are an essential tool in our data-driven and hyper-competitive world— allowing us to be transparent in our collaborations. They protect entities from having their data shared maliciously and forestall corporate espionage. They are a baseline requirement for any organization that values its information and wants to collaborate freely. With NDAs in place, typical business activities can proceed without the risk of exposure from the release of sensitive information. That means negotiations can proceed between collaborators — or even more fundamentally — an investor can gain access to all the pending technological upgrades of a product they are interested in supporting.

More about Ironclad

Ironclad is the leading digital contracting platform for legal teams. By streamlining contract workflows, from creation and approvals to compliance and insights, Ironclad frees legal to be the strategic advisors they’re meant to be. Ironclad is used by modern General Counsels and their teams at companies like Dropbox, AppDynamics and Fitbit to unlock the power of their contracts data. Ironclad was named one of the 20 Rising Stars as part of the Forbes 2019 Cloud 100 list, the definitive list of the top 100 private cloud companies in the world. The company is backed by investors like Accel, Sequoia, Y Combinator and Emergence Capital. To learn more, visit our homepage.

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