What is a non-disclosure agreement (NDA)?


What is the meaning of NDA?

Non-disclosure agreements (also known as confidentiality agreements) are common for founders and startups entering into agreements with new partners, vendors, or other types of businesses. The NDA protects the business by prohibiting the signee from disclosing certain, specific information about the company without the permission of the other party. 

NDA contracts are important because they allow your startup to share information with new business partners, without worrying that it will end up in the hands of your competitors. Without an agreement in place, founders would be concerned that their proprietary and confidential information could be leaked on the internet, through third-party applications, or even purposely disseminated to do damage to the company.

What is the purpose of an NDA?

When your startup needs to share information between parties, a mutual NDA ensures that important and confidential information stays between the parties unless authorized. Anyone outside of the agreement is not permitted to know the details of the relationship, protecting both sides.

When a mutual NDA is signed, both parties typically agree not to share each other’s information with other parties outside of the agreement, unless stated. This keeps information confidential and offers legal recourse if the information is disseminated without authorization.

NDAs are used in the business world for a variety of reasons. For example, it’s common for founders of tech startups to have new employees sign an NDA before you introduce them to the technology they’ll be working with. This protects intellectual property rights and the startup by forbidding employees to leak technology or ideas to third parties outside of the company. 

NDAs can also protect parties from potential litigation since the agreement lays out in detail what information can and cannot be shared. Parties that break this agreement can be held liable by the startup for any damages disclosure of information may have caused. Since the agreement typically expresses specific information that cannot be shared without the express written consent of all parties, it reduces the chance of a misunderstanding or accidental disclosure results in legal action.

The different types of non-disclosure contracts

There are various types of NDAs that founders use, depending on the needs of the parties involved. The three main types of NDAs are unilateral, bilateral, and multilateral agreements: 

  1. Unilateral NDA: These agreements are between an individual and another party. A unilateral NDA (also known as non-mutual NDAs) is a basic NDA used when a company hires an outside contractor or freelancer to provide services for the business. This type of agreement only binds the receiving party to keep the information confidential.
  2. Bilateral NDA: Bilateral or “mutual” NDAs are used between two parties that each share confidential information. These agreements are common among startups which may be involved in a joint venture with another company. 
  3. Multilateral NDA: Multilateral non-disclosure agreements are mutual agreements used when multiple parties disclose information. It is generally used by startup leaders seeking collaboration on certain projects. It protects all parties involved from disclosing or misusing all information provided by any of the participating entities.

Each party needs to read and fully understand the type of NDA used, the terms outlined in the agreement, and the duration of the agreement before signing. These are vital instruments, especially for startups, and you must abide by the terms of the agreement as outlined in the NDA.  

What is the typcial term of an non-disclosure agreement?

In general, the term of a non-disclosure agreement is the duration the agreement remains in force. For founders, you need to understand the type of agreement and the length of time you believe the relationship will last, before specifying the expiration term in the agreement. The majority of NDAs define the term as one year after the signing of the document. The term can also be determined by the completion of a project, where it automatically expires at the end of that contract period. 

Founders must also understand that the term of an NDA is generally a non-negotiable point of contention in the agreement. However, there are some NDAs that allow the contract to be terminated by mutual agreement of all parties. This is done to ensure that information remains confidential for the entire term of the agreement, without one party unilaterally deciding to terminate the contract.

Keep in mind that the term is set by the duration both parties agree to work together. Some agreements may terminate after one year but may include a non-compete clause that may continue for several years after the term expiration date.

Non-disclosure agreements: Key takeaways

There are countless ways to protect yourself and your business with an NDA as a startup founder. Whether it’s protecting financial information, intellectual property, software, or personnel data, an NDA is an essential business agreement.

As discussed earlier, non-disclosure agreements can be customized in a variety of ways to fit almost any need or industry. Different industries have varying requirements, and an NDA can be constructed to fit a startup leader’s unique specifications. Here are some key takeaways from on NDAs:

  • An NDA is typically signed before business discussions begin between two or more parties.
  • An NDA confirms a confidential relationship exists between two or more parties, protecting and limiting the dissemination of information with others.
  • An NDA is also referred to as a confidentiality agreement.
  • There are three main types of NDAs: unilateral, bilateral, and multilateral.
  • There are two primary forms of NDAs: mutual and non-mutual non-disclosure agreements.
  • Founders often use NDAs as a requirement for employment to shield employer’s private business information from competitors.
  • Non-disclosure agreements can have an expiration date of one year or after the completion of a specific project.

Having NDA form templates prepared and ready to send out should be one of the first orders of business. To protect your company, your innovation, and your technological advantage, a bulletproof intellectual property NDA is essential for any business.

Disclaimer: LTSE is neither a law firm nor provides legal advice. Before making decisions on matters covered by this post, readers should consult their legal adviser.

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