Let’s say your company is developing a new product, service, or technology. Everything is falling in place, but you need to hire some independent contractors to move ahead with the project. How do you make sure they do not steal your idea and pass it off as their own?
The answer is the use of a non-disclosure agreement. A non-disclosure agreement (NDA) is a legal document that helps keep private information confidential. Sometimes called a confidentiality agreement, an NDA allows individuals and businesses to work together without the fear of private information getting into a competitor’s hands.
But when should you use an NDA, and what should you include in it? This article will discuss how to start an NDA document and review its key elements.
When Do You Need a Non-Disclosure Agreement?
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You may want to use an NDA whenever you are sharing some valuable information about your company that you wish to remain confidential.
Here are some situations that make sense to use an NDA:
- Sharing a new concept or invention with a potential investor, partner, contractor, or distributor
- Explaining financial or marketing information with a prospective buyer of your business
- Revealing a new product, service, or technology to a prospective licensee or buyer
- Receiving services from another company that may have access to sensitive information while providing those services
- Giving employees or independent contractors access to proprietary information during the course of their job
On the other hand, there are some situations when an NDA is unnecessary or inapplicable.
- If the other party already knows the information covered by the NDA
- If the other party learns the confidential information from a source outside the company
- If the information in the contract is already public knowledge
- If the research was developed independently by the receiving party
- If the confidential information can be subpoenaed, it might not qualify as confidential under an NDA.
What Are the Two Main Types of NDAs?
NDAs have two basic formats — mutual agreement or one-sided. You’ll use a one-sided NDA when only one party is sharing private information with the other party.
A mutual NDA comes into play when both parties side may be sharing confidential information with each other.
What Are the Key Elements of an NDA?
After deciding whether you’ll use a one-sided or a mutual NDA, you’ll need to name all the parties involved in the contract. Here are the other key elements that should be part of your agreement.
- A description of the confidential information. No one wants to put the confidential information in writing – that defeats the purpose – so there are a couple of ways to go here. Both parties may agree that all information – both oral and written — disclosed by either party is considered confidential. Or, the contract could include a broad statement with terminology stating that any information a reasonable person would assume is private is considered private.
- The obligations of all parties. The NDA should clearly state the requirements of each party. For example, the party receiving the confidential information must take all reasonable steps to protect the information and refrain from using the information for personal gain.
- Any exclusions to the agreement. This section reveals any situations in which one of the parties may share the confidential information as part of doing their job. For example, an employee might have to share private information with a third-party servicer performing an approved job.
- Term of the agreement. This section states a definite time period for the NDA. A reasonable timeframe depends on the type of information and the industry you are in. Some NDAs may have indefinite timeframes but may have a term of five to 10 years.
- Consequences of a breach of the contract. If an NDA is breached, one party may sue the other for monetary damages and seek court action to prevent further disclosures. This section of the contract details what happens if the confidentiality agreement is breached. For example, actions may include the termination of employment, liquidated damages, attorney’s fees, and other expenses.
How Do I Create an NDA?
A non-disclosure agreement is a valuable business tool that allows you to share private information without fear of it being stolen or shared without your permission.
You can find a variety of templates for NDAs online. These templates will include the general legal information and offer blanks you can fill in for your own unique situation.
When drafting your NDA, it is critical to be as detailed as possible, so all parties understand what information can and cannot be shared and the consequences of leaking private information.
However, in order to perform its job, an NDA doesn’t have to be lengthy and complicated. Most NDAs are only a few pages in length.