Do small businesses need NDAs?

If drafted well, nondisclosure agreements, also called NDAs or confidentiality agreements, can protect your business's non-public information, such as trade secrets, patents, designs, client lists, and marketing research. Not sure if your small business needs an NDA? Read on.

What is an NDA?

An NDA is a legally binding contract between parties who agree to keep certain information confidential. The information may be shared during the course of employment or during a business transaction or interview. NDAs may be "mutual" (both parties have confidential information to protect) or "one-way" (only one side is disclosing confidential information). The side getting the information is often called the "receiving party."

In either situation, when someone who has agreed to protect secret information violates the NDA, the other party may sue for injunctive relief to stop the release of information and recover damages—possibly including lost profits.

What kinds of information does an NDA cover?

NDA can be used to protect any business information that gives you a competitive edge but is not known to the general public.

Examples of information that may be protected include:

• Inventions, plans for an invention, or products shared with an employee, partner, potential partner, independent contractor (such as a freelance writer hired to prepare a grant application or proposal), investor, or buyer
• Business plans, financial, marketing, and other confidential information presented to a partner, potential partner, independent contractor, investor, or buyer
• Ideas for new marketing materials, websites, blogs, etc. shared with employees
• Copyrighted software programs used or partially developed by employees or other technology shared with a potential buyer or licensee
• Confidential and proprietary information that may be accessed by employees or collaborators, including independent contractors hired by the business
• Information, plans, ideas, etc. generated among a working group, e.g., in the development of a computer or other technological application
• Recipes, formulas, and other chemical combinations—think the recipe for Coca Cola, or perhaps the increasingly famous butter cookies you're building your business around.

What are the components of an NDA?

Make sure any NDA you have drawn up includes the following elements:

• Confidential information protected and excluded: You need to protect whatever confidential information is valuable to your business; you want to be as specific as possible without, of course, actually disclosing the secrets in an NDA. Excluded items are based on legal principles; information that cannot be considered confidential includes that which has been created or already known by the receiving party.

• Obligations of receiving party: Generally the receiving party cannot reveal the confidential information in question and must also limit its use. There may be some instances in which use of the confidential information would be authorized; an NDA should specify those as well as the appropriate manner of disclosure.

• Consequences of breach: A provision detailing that you can seek injunctive relief and damages in case of breach should be included in an NDA.

• Length of agreement: Although many businesses would like their secrets to remain mysteries forever, an NDA should have a limited time period, often five years from the date of execution of the agreement, but this is a negotiable point.

• Method of dispute resolution: An NDA should specify which state's law will apply, whether arbitration will be used, and whether attorney fees will be available to the winning party in case of the breach of or a dispute regarding the agreement.

There's a good chance that the thing that makes your business unique is also the thing that makes it successful. Whether you have an innovative business plan, a secret recipe, or a great invention, confidentiality may be the key to your business's success.