Any time you share confidential information about your business, it's a good idea to make sure that information stays confidential and can't be shared with your competitors. Common situations where sensitive information is shared include when you're seeking an investor, considering a merger, or hiring a consultant.
In such cases, negotiating a nondisclosure agreement (NDA) can help protect your business and its information, such as financial statements, your business plan, customer lists, and more.
A nondisclosure agreement requires the person or company you are sharing your information with to keep it secret. The document also makes sure that anyone they need to share it with, such as an accountant or lawyer, must also keep it to themselves for the length of the agreement.
When negotiating an NDA, keep the following in mind.
1. Don't Release Information Before the Agreement Is Signed
It can be tempting to get business started while negotiations are still ongoing, but if you share information before agreeing on terms for the NDA, you've made your business potentially vulnerable to leaked information.
2. Work With a Professional
You can find lots of free NDA forms online, but it's essential the document is tailored directly to your specific business and situation. Work with an attorney or use a tailored NDA form to ensure the document best protects your interests.
3. Use a Unilateral NDA, if Possible
An NDA can be unilateral or mutual. A unilateral NDA requires the other party to keep your information confidential, while a mutual NDA goes both ways, requiring each of you to keep the other's information private. With a unilateral NDA, it's simply easier not to have to think about protecting information you receive from your potential business partner.
4. Choose an End Date
An NDA is not open-ended: it must have a set date for the agreement to end. Most NDAs last for several years, which offers ongoing protection while the shared information is current.
5. Define the Confidential Information
It's important that your agreement is very clear about what information is confidential and thus covered by the agreement. Although the other side will want this definition to be narrow, you should negotiate to make it as broad as possible to offer your company the greatest possible protection.
6. Provide Extra Protection for Trade Secrets
In addition to the confidential information you share during your workings with the other party, you may also be disclosing trade secrets, the proprietary knowledge that gives your business a competitive edge. An example of a trade secret is the herb and spice mix used by KFC. If you are sharing trade secrets, you want them to be protected for as long as the information is secret, whereas the NDA will have an end date for the protection of regular confidential information. Be sure to include a clause that specifies the ongoing protection of trade secrets.
7. Define How the Information Will Be Used
Because the company or person with whom you're sharing your information will need to use it in the course of business, the NDA should specify exactly how they are allowed to use it. This practice will help avoid any confusion.
8. Require Return of the Information
Any information you've shared under the agreement should be returned to you once the agreement ends. Digital information should be destroyed or deleted, although you may need to be flexible on this point since most digital information is rarely entirely deleted. This clause reduces the chances that the information will be leaked.
9. Include Options for Remedies
Your NDA should provide solutions in the case the agreement is breached. Include options for injunctions, or court orders preventing further disclosure, as well as monetary compensation for damage done to your company because of the breach.
While an NDA can't guarantee your information will remain confidential, it does provide assurance that the other party is legally bound to the terms of secrecy. Carefully negotiating an NDA will make the terms of the agreement clear to both parties so you can both work together with confidence.