Legal Guide

Non-Disclosure Agreements: What Entrepreneurs Should Know

Whether you are freelancing or own a startup or small business, signing non-disclosure agreements (NDAs) will be a common part of your entrepreneurial journey. We’ll explore four key things you should consider for each NDA you sign. (You might also want to check out our guides on non-compete agreements and non-solicitation agreements, which are closely related to NDAs.)

 

1. Mutual or Unilateral

First, consider whether the NDA is unilateral or mutual. A unilateral NDA means only one party is agreeing to protect the other party’s confidential information; while a mutual NDA means both parties are agreeing to do so.

This is an important consideration and the final outcome will depend on several factors including the bargaining power of the parties and whether or not both parties are actually disclosing confidential information.

>> We sell both unilateral and mutual NDAs in our Contract Shop.

 

2. Non-Disclosure & Non-Use Obligations

The core element of an NDA is the obligation not to use or disclose the other party’s confidential information. In most situations, the NDA will say the receiving party (a) cannot disclose the confidential information to third parties, (b) cannot use the confidential information for their own benefit, and (c) will use reasonable efforts to protect the confidentiality of the confidential information.

However, it is usually a good practice to include exceptions that allow the recipient to disclose the confidential information to certain people such as lawyers, accounts, and other parties, provided those additional recipients are under a written agreement not to disclose the confidential information.

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3. What Constitutes “Confidential Information”

There are several ways to define “Confidential Information.” You can say all information disclosed is “confidential” or that only stamped information is “confidential.” More commonly, you’ll see a definition that describes what constitutes “confidential information” but then states that any information that a reasonable person would deem confidential is included in the definition.

When writing this definition, you might want to add exceptions. For example, information commonly known in your industry or information the recipient properly obtains from some other source.

 

4. Length of Non-Disclosure Obligations

Your NDA should include a term. If the NDA is created for exploring a potential business relationship, it will normally have a short term of about one to five years. If the NDA is part of a larger ongoing agreement, then the term should be for the length of that agreement plus some period of time after the termination of the relationship (for example, another five or ten years).

In some cases a perpetual term makes sense, but you should carefully consider the practical implications for your situation before agreeing to a perpetual NDA.

And last, it is often a good idea to also call out trade secrets in the NDA and state that trade secret protection will survive for as long as your state’s trade secret law provides.

 

Bonus Tip: Look for Additional Terms

Sometimes a party will try to sneak other terms into an NDA such as non-solicitations, non-competes, transfers of intellectual property, and similar terms. In some situations that is appropriate. However, it is often cleaner to capture those obligations in a different agreement, be it an employment agreement, contractor agreement, client agreement, or something similar.

(This article is general in nature and is not legal advice.)

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