The purpose of a nondisclosure agreement (NDA) is to allow two parties to conduct business while ensuring that any information exchanged is kept private.
Before you sign an NDA, keep the following seven points in mind.
1. Parties to the agreement
The nondisclosure agreement should identify the parties to the agreement and which one is the disclosing party, or side sharing the information, and the recipient. Names and addresses of the parties should be included.
The agreement should also identify other individuals who may be parties to the agreement. For example, if an investor is the recipient, they might need to show the information to their attorney, accountant, or business partners. The nondisclosure agreement will also bound these additional parties.
2. Identification of what information is confidential
Before you sign a nondisclosure agreement, be sure the agreement is very clear about what information is protected and what is not.
This is called the scope of the agreement. Nondisclosure agreements commonly cover matters such as customer lists, business plans, personnel information, financial statements, information about inventions, and trade secrets. The disclosing business usually wants the scope to be as broad as possible, while a narrower scope is more advantageous for the recipient.
The agreement should also explain how the recipient can use the information, such as only for evaluating the disclosing party's business for purchase.
The agreement should clearly define the exclusions to the agreement, or the types of information that do not need to be kept confidential, such as information an employee knew before they started working at a company or information a potential investor was aware of before they looked at a business plan.
Exclusions to the agreement also include material that is public knowledge and information the recipient had already developed on their own or previously disclosed to them.
3. Time frame of the agreement
The document should indicate how long the agreement is binding, which can often be several years, even if the end date is after the business between the parties has concluded.
For example, if Tim's Department Store is considering buying Norma's Village Boutique, the parties will execute an NDA so Tim can see Norma's business details. Even if he decides not to buy the business, he must still keep the shared information confidential for the agreement's length.
4. Return of the information
Once the business between the parties has concluded, or an employee has left a job, the agreement requires that confidential information be returned to the disclosing party or destroyed or deleted. The recipient usually needs to confirm they have done this.
For example, Myra's Handmade Booties shares its business statements with Mateo's Angel Investors, who are considering investing. Once Mateo either concludes the deal or decides not to invest, any documents he received must be returned, and any electronic data must be destroyed. (It's worth noting that, although most electronic data is never completely deleted, it should be deleted from daily accessibility.)
5. Obligations of the recipient
A nondisclosure agreement usually states that the recipient agrees not to disclose or use the shared information, whether purposely or inadvertently.
For example, as the potential investor in a video game, you are given access to the software to test drive it. If you play the game on the subway, where other people can see it, you've breached the agreement.
A cellphone company employee testing a prototype model and mistakenly leaves it in a coffee shop would likely also be found to have breached the agreement.
6. Remedies for breaches of agreement
The NDA should state the course of action the disclosing party can take if the agreement is breached. This could include:
- Injunctions. The disclosing party often has the right to obtain an injunction against the recipient if they breach the agreement, to prevent further breaches.
- Indemnification from loss caused by the breach. The disclosing party is usually entitled to compensation for damage caused by the breach.
- Other remedies rooted in breach of contract. These could include actions for copyright, patent, or trademark infringement; breach of fiduciary duty; and more.
7. Other clauses
There are additional clauses to look for in a nondisclosure agreement, including:
- Jurisdiction. The agreement should state where any disputes about the agreement will be handled. Consider whether that location is convenient for you.
- Mutual nondisclosure. It's a good idea to create a mutual nondisclosure agreement in some situations, which requires both parties to keep information they have learned confidential. When information is shared in only one direction, it is known as a unilateral nondisclosure agreement.
- Nonsolicitation. It's common for an NDA to prevent the recipient from hiring away employees from the disclosing party or preventing them from contacting the disclosing party's clients or customers.
Although every NDA is different and so may include clauses not mentioned above, these are seven of the most common sections to look for. To create your own document, you can have an attorney draft one or use an online NDA template.