A nondisclosure agreement (NDA) is a legally binding document that establishes a confidential relationship between your business and a different party. NDAs are common, particularly with startups and entrepreneurs who want to protect certain elements of their business, such as ideas, ingredients, a design, or processes, but they can be applied to a range of situations. Here’s how NDAs work, what to include in one, and how to enforce your confidentiality agreements.
What is a nondisclosure agreement (NDA)?
A nondisclosure agreement is a legal contract between two parties that prohibits the sharing of proprietary or confidential information. NDAs are common between businesses and their employees, vendors and suppliers, and when sharing a business idea with investors.
The goal of an NDA is to protect sensitive information, such as an element that confers a competitive advantage. The goal is confidentiality, not commerce, meaning NDAs are protective measures rather than trademarks or copyrights.
Types of NDAs: Unilateral vs. mutual
There are two types of nondisclosure agreements:
- Unilateral (one-way) NDA: Only one party is sharing sensitive information (e.g., a company hiring a contractor).
- Mutual (two-way) NDA: Both parties are sharing sensitive information (e.g., two companies exploring a merger or partnership).
A unilateral (or one-way) NDA is the right fit when only your business is disclosing sensitive information. Use this type of NDA when hiring a freelancer who needs access to your client list, pricing strategy, or product plans but who isn't sharing anything confidential of their own in return. This is the most common NDA type for small businesses, since day-to-day situations like hiring, onboarding vendors, or briefing a marketing agency usually involve a one-way flow of sensitive information.
A mutual (or two-way) NDA is used when both sides are exchanging confidential information, and both need protection. Use this type of NDA if you’re exploring a partnership, evaluating a potential acquisition, or co-developing a product with another business.
What an NDA generally can't protect is information that's already public, was already known to the receiving party before the agreement, becomes public through no fault of the signee, or is developed independently of your disclosure.
When should a small business use an NDA?
Experts recommend putting an NDA in place any time you share something valuable about your business that would present a risk if it were disclosed or stolen. There are a few common scenarios when you should ask for an NDA.
Employees and contractors who access confidential information as part of their job often sign NDAs. Anyone who works with contracts, client lists, or internal processes might sign an NDA so when they leave, your secrets don’t walk out the door with them. Likewise, any third-party vendor that accesses your system — marketing agencies, information technology companies, or suppliers — could sign NDAs.
If you license your products or services, you could also get signed NDAs from licensees. Even early informal conversations — like pitching an idea to a manufacturer or discussing a possible collaboration with another company — might be worth covering with an NDA. Protect your valuable information with a confidentiality agreement.
Key elements every NDA should include
NDAs are easily customizable depending on what each party needs, but generally include five elements.
- Participants: Define who the agreement applies to. This can be a specific person, all employees of a company, or a company representative.
- Definition of confidential information: Detail what specific information is protected by the agreement, such as business plans, client lists, technical specs, etc.
- Exclusions: Define what information is already public and isn’t covered by the confidentiality agreement.
- Obligations: Determine what the receiving party can and can’t do with shared information. For instance, some agreements blanketly limit any type of disclosure; others specify it can’t be used for competing purposes.
- Time limit: Specify how long the confidentiality obligation lasts.
- Consequences: Outline what happens if the agreement is breached.
As you write the NDA, consult with a legal expert who can ensure you accurately and lawfully define what the NDA does and does not protect and that doesn’t run counter to whistleblower protections.
What an NDA can and cannot protect
An NDA can protect any nonpublic information you've defined as confidential in the agreement. But protection often depends on how precisely the agreement defines "protected information.” Vague or overly broad definitions can be hard to enforce, since a court may find them unclear or unreasonable.
What an NDA generally can't protect is information that's already public, was already known to the receiving party before the agreement, becomes public through no fault of the signee, or is developed independently of your disclosure.
An NDA doesn't prevent a breach from happening. It only gives you legal recourse after the fact, so it's not a substitute for basic precautions like limiting who has access to sensitive information in the first place.
What happens if someone violates your NDA?
There are multiple consequences if someone violates your NDA, depending on the severity of the offense.
“An individual will typically be sued if they break an NDA, which can result in a monetary fine, termination of employment, or the return of an asset,” wrote Investopedia. “You may also be sued for intellectual property violations such as copyright infringement or breach of fiduciary duty. A court can levy financial damages and associated legal costs.”
If you believe someone has violated an NDA, first refer to the original agreement to see if it outlines the penalties or recourse for breaking the contract. You will need to build a case if you decide to take legal action.
Pursuing legal action requires finding a lawyer who can advise you on the next steps. They may send a cease and desist letter, open a lawsuit, or seek damages on your behalf.
Do you need a lawyer to create an NDA?
Simple, unilateral NDA agreements that you may use with a contractor or freelancer typically don’t need a lawyer’s involvement. You can find a template online and customize it for your needs.
For low-stakes, routine situations, using a template is often sufficient to establish basic protections without the exorbitant cost of legal fees. Depending on your business and the information you want to protect, you can hire a lawyer to help ensure the confidentiality definitions, duration, and remedies are enforceable in your jurisdiction, since generic templates don't always hold up if challenged.
A middle-ground option that many small businesses use is to hire a lawyer to review or lightly customize a template once, which you can then reuse the vetted version for future routine situations, saving legal costs while still establishing enforceable protections.
For more complex situations, such as preparing your business for sale or signing a significant partnership agreement, it’s worth consulting with a lawyer.
How to write a basic NDA
There are plenty of free templates online you can use to customize your NDA. As you tailor the NDA, keep the language plain and specific. If a significant sum of money or valuable trade secrets are at stake, of course, have a lawyer review the final version.
A basic, unilateral NDA should have these sections:
- The parties: The full legal names and addresses of the disclosing and receiving parties.
- Define confidential information: Specify categories like financial records, customer lists, product designs, or business strategies. Precision here makes the agreement easier to enforce.
- State the purpose: Explain why the information is being shared (e.g., "for the purpose of evaluating a potential business partnership"), which limits how the receiving party can use it.
- Outline obligations: Specify that the receiving party must keep the information confidential, not disclose it to third parties, and use it only for the stated purpose.
- List exclusions: Exclusions can include standard carve-outs for information that's already public, already known to the receiving party, or independently developed.
- Set the duration: Define how long the confidentiality obligation lasts (commonly one to five years, though trade secrets sometimes warrant indefinite protection).
- Include remedies: State what happens if the agreement is breached, such as the right to seek damages or an injunction.
- Add signature lines: Both parties are to sign and date the agreement for it to be enforceable.
NDAs can last for a certain time frame or indefinitely. If you decide to keep it indefinite, consult your state regulations. Some states don’t recognize NDAs that are open-ended or generic.
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