Why Is a Nondisclosure Agreement an Important Tool for Businesses?

Why Is a Nondisclosure Agreement an Important Tool for Businesses?

How can a non disclosure agreement (NDA) help your small business? All business relationships are built upon trust. No matter the size of your business, being able to rely on your employees and partners is critical for maintaining peace of mind. Using NDAs to legally ensure that vital information remains private reinforces trust. 

What Is a Nondisclosure Agreement?

A NDA, also referred to as a confidentiality agreement, is a legally binding contract that protects non-public business information. A NDA will clearly outline what information is expected to remain private, and will include possible penalties for breaking the contract. Any disclosure of the confidential information protected by a NDA will result in consequences for the party who broke their promise. The NDA lays out the expectations between one or more entities or individuals.

Some NDAs are unilateral, which means only one party is disclosing private information. A NDA can also be a multilateral confidentiality agreement where confidential knowledge is shared amongst two or more parties, with all sides agreeing to keep the information at issue secret. 

As a legal document, breaking a NDA can result in a lawsuit. In such circumstances, the party that did not breach its duties under the NDA will ask a court to remedy the non-public data’s potential exposure. Remedies may include injunctions to prevent further spread of the information or the payment of monetary damages as reimbursement for the harms caused by its exposure.

When Should Small Businesses Use NDAs?

There are a variety of situations where a NDA may benefit your business. As a business owner, you may want to consider using a NDA in any of the following scenarios:

Employment Contracts

Your employees may have access to some of your most sensitive business data. Tradecraft, customer lists, financials, or potential innovations are just a few of the pieces of knowledge you do not want your employees openly disclosing. Worse still, once they move on from your company, you do not want your proprietary secrets to end up in the hands of your competitors.

When hiring new employees, having them agree to a NDA or confidentiality agreement as part of their onboarding can prevent future hassles. Additionally, some states may not allow you to require existing employees to sign NDAs as a condition of continued employment. Because contract law requires that every party to a legal contract receive something of value in return for their acceptance, you may need to do more to make a new NDA binding on current employees. If you determine you want your existing workforce to sign a NDA, in order to ensure the NDA is legally binding, consider offering some sort of benefit, bonus, or raise in return for them signing the agreement.


The vendors you work with in the ordinary course of business can often access your valuable business information. Marketing campaigns require customer data so the right audience is targeted; data analysis firms need access to sensitive logs of website interactions, social media views, or sales records; your accountant has access to all of your business’ financial data. 

While all of those businesses partner with your business to add value to it, you may want to ensure vendors and their employees, contractors, and agents protect your business secrets by requesting that they sign a confidentiality agreement. This is especially important in today’s world of cloud computing and interconnectivity where information is often exposed accidentally. If a breach affecting your vendor ends up injuring your company, a NDA can add extra protection to your business. 

Potential Investors

Growth is essential to the success of all small businesses. Along the path from start-up to established organization, you may need to seek capital. Before investors commit to backing you, they will likely require access to sensitive information such as business plans, financials, customer lists, and intellectual property. You do not want a potential silent partner to see your innovations and then decide to become your competitor instead of your benefactor. In return for granting them access to your books or your trade secrets, it’s a good idea to have potential investors sign a NDA.

Standard Terms Included in Well-Drafted NDAs

No matter the purpose of a nondisclosure agreement, the contract will typically include the following provisions:

The Parties Bound by the NDA

Like all contracts, a NDA will outline who is required to uphold its requirements. The parties may both be individuals, may all be entities, or may be a mix of individuals and entities.

The Non-Public Information Covered by the NDA

This provision is vital to all well-drafted NDAs. The contract should clearly state the scope of the proprietary information or data that is meant to remain undisclosed. When contemplating a NDA, be sure to hone in on precisely what information you want kept secret.

The entire point of a NDA is to protect essential knowledge. If the NDA defines the protected information too narrowly, you may not be able to prevent someone from disclosing confidential or harmful information. On the other hand, state law may invalidate a NDA if the information it attempts to restrict is too broadly defined. Careful crafting is vital because courts will only enforce NDAs as far as they protect your interests as the disclosing party.

Always be aware that there are certain pieces of information you cannot restrict through a NDA. These areas include:

  • Information that is already public.
  • Information already known by the receiving party.
  • Information that was discovered by the receiving party outside of the agreement.
  • Any information that is legally required to be disclosed.

For example, your business generally cannot prevent an employee from disclosing information to a government regulator during the course of an investigation.

The Duration of the NDA

A NDA can remain enforceable for as long as the disclosed knowledge remains non-public. However, the parties to a NDA may want to consider using a NDA that has a set length or offers a termination clause.

A termination clause can be used when the disclosure is only necessary due to a business relationship. If the parties to a NDA are no longer working together, the NDA can cease to bind the entities. Care should be taking to explicitly define how each party to the NDA should notify the other(s) that they intend to terminate the agreement. 

In some cases, just because your business is over, there may still be value in keeping something secret. If you find yourself in that situation, you should likely include a survival clause which acts to require nondisclosure for a period of years following termination of the agreement.

Nondisclosure agreements can be used regularly in the course of business or only used in unique instances. Regardless, your company needs experienced counsel to review your practices. Do not end up with an invalid or worthless NDA because you only turned to Google for help.

Partnering with a knowledgeable business attorney can allow you to develop NDAs that are perfectly tailored to your needs. At Mod Law Firm, we make a point of truly understanding our clients’ businesses and providing legal support that allows our clients to achieve their missions. Schedule a virtual consultation today to discuss creating a nondisclosure agreement for your business.

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