Non-disclosure Agreement: Meaning, Importance and Benefits

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Non-disclosure Agreement:

A non-disclosure agreement or NDA is a written contract between two parties (people or organisations) that prohibits the sharing of confidential information shared between both the ends.

If you are running a business, or are about to start one, you know that there are numerous instances where you end up sharing confidential information with another party. And this fear of your data or information being misused sinks in. But hey, there’s a solution to this, just so that you can leave all your worries and focus on your business. It’s those three awesome letters: NDA or non-disclosure agreement! Read this article further to master the term and create a safe ecosystem for your business. 

What is a Non-disclosure Agreement or an NDA? 

A non-disclosure agreement or NDA is a written contract between two parties (people or organisations) that prohibits the sharing of confidential information shared between both the ends. 

In a nutshell, if you are asked to sign an NDA, you are asked to promise that the sensitive information shared with you should not pass on to any other body or an individual. On the other hand, if you are the issuer of an NDA, you are asking someone else to not share the information with anyone, that you might share with them. 

You can identify a non-disclosure agreement by other names like:

  • Confidential Agreement (CA)
  • Confidential Disclosure Agreement (CDA)
  • Secrecy Agreement (SA)
  • Proprietary Information Agreement (PIA)

Key elements of Non-disclosure Agreement 

A few of the major elements of an NDA include (not limited to the following):

  • Identification of the parties that are signing the agreement 
  • A precise definition of what is considered confidential under the agreement 
  • The clear reason as to why the information is shared and for what purpose 
  • An elaborated explanation as to how the shared information can and cannot be used 
  • Explicit information about the timeframe or the duration of the agreement

Types of Non-disclosure Agreements

Generally, there are three types of NDAs:

  • Unilateral NDA: In this type of NDA, two parties are involved. Out of the two, only one party discloses confidential information and expects the other party to prevent the information from any further disclosure.
  • Bilateral NDA: In this type of NDA, two parties are involved and both the parties disclose confidential information to each other with an intention to protect and secure the information from external parties.
  • Multilateral NDA: In this type of NDA, three or more parties are involved, out of which one of the parties discloses a piece of confidential information and the other parties promise to have that information protected from any further disclosures. 

When do you need a Non-disclosure Agreement

There are multiple instances when you might require to sign an NDA for your business. A few of them include:

  1. While entering into a business deal: If you are inviting a vendor or a consultant and want to ensure that the information you share does not go out, signing an NDA is the best option. In early-stage startups and some information sensitive companies, it is a brilliant idea to make each employee sign an NDA. This helps in ensuring that something as simple as the strategies, projected numbers and funds do not go out of the ecosystem. 
  2. While starting a new project: Let’s say you are an established business and planning to start off a new project. This would require the involvement of both internal and external stakeholders. It is advised to sign off an NDA so as to avoid any ambiguity or claims that may arise from either end at any point in time.
  3. While talking to investors or during mergers and acquisitions: This was a very common practice in the past. However, modern-day investors deny to sign NDA at a very early stage and hence, the practice is becoming obsolete now. At a point when the need arises to look inside the papers and numbers and the communication reaches the advanced stage, a request to sign an NDA can be made. This should carry clear justifications as to why signing an NDA is needed. Same goes with the process of mergers and acquisitions. 

Benefits of Non-disclosure Agreements

Here are some of the major benefits of an NDA:

  • Since NDA is a legal document, it is of immense importance for any conflict that might arise in the future. Any party infringing the agreement would be legally liable to compensate for damages.
  • It clearly states (in written format), anything that comes under the bracket of ‘confidential’, in the long run avoiding any ambiguity or loss of information.
  • It maintains the secrecy of the information shared between two or more parties and reduces the chances of important information going out of the organisation.
  • Overall, it protects disclosures of intellectual property (including trade secrets, proprietary information and other confidential information), safeguarding the organisation as a whole.

Precautions while creating and signing a Non-disclosure Agreement

While you go ahead and create an NDA for your business processes, here are a few things you need to take care of: 

  • Ensure that all the information mentioned is precise and the language used is simple and unambiguous
  • You must make the involved parties read the entire NDA and verbally explain it. This will help in avoiding any further misunderstandings
  • Do not involve non-required clauses or use conflicting sentences while drafting the document
  • Make sure that the document has an expiration date and if need be, renew the same if required

What happens if any clause from the Non-disclosure Agreement is violated?

At any point, if you discover that any confidential information covered under a clause of the NDA is being shared publicly, it is crucial to quickly gather evidence against the action. Get answers for questions like who has leaked the information, how have they leaked it, what is being done with the information and so on. The next step is to hire an attorney familiar with business nature and further follow the legal road.

With this, you are all set to safeguard your business and its details by drafting a quality NDA in place. NDA comes under the bouquet of the little things that build the prerequisites of any successful business.

So the next time you are about to kick off with a new strategy, use the above-mentioned points and keep securing your business while you grow!

Also read: All You Need to Know about Balance Sheets