Knowing how to write a non-disclosure agreement is a critical skill every entrepreneur should learn.
Operating a business requires an element of trust between the business and its employees.
And other contacts and stakeholders that you may have to interact with while conducting business.
In some instances, companies may encounter disloyal employees or other parties.
These entities may go out of their way to profit from the business secrets for nefarious ends. Or just to put your business down.
The best way to protect the secret sauce is to create a legal document that obliges staff or other parties to keep your business secrets confidential.
In addition to the non-compete, one of the most commonly used legal tools in this arsenal is a non-disclosure agreement (NDA).
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Here is the content that we will cover in this post. Let’s get started.
- 1. Definition
- 2. Sections of a Non-Disclosure Agreement
- 3. Definition of confidential information
- 4. Purpose of the agreement
- 5. Parties of the agreement
- 6. Types of Non-Disclosure Agreements
- 7. Unilateral
- 8. Mutual non-disclosure agreements
- 9. Employee non-disclosure
- 10. Interview confidentiality agreements
- 11. Reasons to Create an NDA
- 12. Helps mitigate the possible loss of confidential information
- 13. Creates a psychological deterrent to disclosure
- 14. Clarifies the ownership of intellectual property
- 15. Clarify what needs to be kept secret
- 16. Authorize independent contractors to use company information
- 17. NDA Breaches
- 18. When to Draft an NDA
- 19. Drafting the Agreement
- 20. Disclosing and receiving parties
- 21. Confidential Data
- 22. Exclusion from confidential information
- 23. Non-disclosure obligations
- 24. How long the contract is in effect
- 25. Jurisdiction
- 26. Signatures
- 27. Additional Sections
A non-disclosure agreement or confidentiality agreement is a legal document between two parties. This NDA pledges or bars one or both parties from revealing information.
The information covered by the agreement is often valuable, sensitive, technical, and has commercial value.
You do not have to hire a law firm to draft an agreement. Though their advice may be necessary to create one that is compliant with local laws and to fully protect you.
It can be well worth the investment. Though there are also NDA templates you can use to get a head start.
You can use the agreement to protect information relating to company strategies, products and services, business operations, and accounting.
You’ll also secure customer information, intellectual property, and trade secrets. There are different confidentiality agreements, but many share some key features.
These may include how long the agreement lasts, a definition of the confidential information, and the owner of the information.
Information on the parties signing the agreement is also a part of the NDA.
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Sections of a Non-Disclosure Agreement
A non-disclosure agreement has several parts, clauses, and information in multiple sections depending on the parties and type of agreement.
Definition of confidential information
Here you define everything that falls under the written agreement. The agreement needs to be clear so that all parties can enforce it.
Purpose of the agreement
This section spells out the reasons why the information must be kept secret and details how the information can be used.
Parties of the agreement
Any agreement is only binding to the parties signing it. Each party should be listed by name, role and any legal entity they are signing on behalf of.
Several other elements can be included in a non-disclosure agreement, such as exclusions on the confidential information, and miscellaneous parts.
You would also include the receiver’s obligation, severability, integration, waiver, and a notice of immunity.
The length of time the agreement is in effect is another piece of information in the NDA.
Understanding the different sections of the document will give you a great starting point for learning how to write a non-disclosure agreement.
Running the risk of getting their business secrets stolen is only one of the hurdles a startup owner might face.
While you’re reading up on how to deal with this issue, check out this video I have created.
In it, I have outlined all the potential startup hurdles every entrepreneur needs to overcome. You’re sure to find it helpful.
Types of Non-Disclosure Agreements
All non-disclosures aim to protect confidential information, but not all are the same. Some of the most popular types include the following.
These are agreements made between two parties binding one from revealing the other party’s information.
The contracts are used to protect company secrets, IP, or details of a transaction.
Mutual non-disclosure agreements
A mutual confidentiality agreement is necessary when both parties have the same standing and need to share information between each party.
Mutual NDAs are often crafted during partnerships and mergers when both may need to reveal sensitive information.
When working with a large number of employees, you never know who will leak information out.
All employees may be required to sign employee confidentiality agreements if your company deals with many proprietary products or services.
Such information leakage could reduce your edge over the competition.
Interview confidentiality agreements
Recruiting top executives may necessitate sharing some company secrets. An interview NDA ensures that any information that is shared during the interview process is kept confidential.
The agreement ensures that any sensitive information that is exchanged won’t leave the interview room.
Reasons to Create an NDA
It is common practice for most employers to rely on the implied ethical duty of confidentiality when working with employers.
Breach of trust and leaked company secrets can be remedied by disciplinary action against the team member or fire them for risking operations.
Such measures may never exceed the damage caused by the leaked information.
Over the years, firms like Coca-Cola have taken steps to keep their proprietary information secret.
They have done this by having employees sign an NDA to ensure they do not run the risk of leaked information.
One most curious case of someone using an NDA is about Sabeer Bhatia, the founder of Hotmail. Bhatia forced all employees, roommates, family, and friends to sign 400 non-disclosure agreements.
He completed this process before making out with over $400M in a Microsoft deal.
Here are some of the specific reasons to have NDAs. Getting your objectives lined up will help when figuring out how to write a non-disclosure agreement.
Helps mitigate the possible loss of confidential information
The labor force is not permanent. The talent you have this year will be working for six other firms in the next year or creating their own firm in the next ten years.
Statistics from LinkedIn’s Economic Graph show that the millennial generation is likely to move into at least four different jobs in 10 years.
Each time a team member leaves your firm, they carry information with them. Without an NDA, you risk the loss of confidential or proprietary information.
An NDA places a legal obligation on the team members not to reveal or misuse the company’s information even after leaving the business.
The kind of NDA you can sign with your employees differs greatly depending on the local state laws.
As well as their roles and level of talent and potential access.
You could have them sign non-competition and non-solicitation agreements to prevent them from opening up competing ventures. Or poaching your talent.
Creates a psychological deterrent to disclosure
Many businesses are skeptical about the enforceability of the non-disclosure agreement. And the legal costs in the event former workers or partners leak confidential company information.
In most cases, the existence of an NDA is enough to discourage it. The NDA creates a legal risk to the employee.
It encourages them not to disclose any sensitive information to avoid legal complications.
The psychological deterrent is the most effective arsenal in the protection of sensitive company information.
Clarifies the ownership of intellectual property
Creators of inventions are the owners of the innovation and thus should hold all of the intellectual property rights.
When working with artists in your firm or creating proprietary technology, the staff would likely come up with most of the technology you will patent.
Depending on the state law, the intellectual property may be owned by the employing firm. But due to some vagueness, it could be owned by the staff or other contributors.
States like California, for instance, may grant the staff the right to intellectual property.
That’s is if they developed the technology outside the company resource, supplies, facilities, trade secrets, or time.
An agreement between the employer and team member is important to declare the ownership of the intellectual property developed in the firm.
This is why, you should know how to write a non-disclosure agreement.
Clarify what needs to be kept secret
Employers know the kinds of information they have that should be secret and what is public knowledge.
It is up to the employer to demarcate the kinds of data that need to be kept private and those they can freely use and share.
Some of the information can be included as proprietary algorithms, product information, strategic plans, company leads, and customer data,
Upcoming innovations and data also need to be kept confidential.
Authorize independent contractors to use company information
No business works in isolation, and once in a while, you may have to hire contractors, vendors, freelancers.
Or enter into a partnership with a different business to facilitate business operations.
Effective service delivery means that you must divulge certain information with the partners.
You may also wish to bind them with an NDA to prevent them from sharing it with unauthorized people.
When you’re pitching your business idea to investors, getting them to sign an NDA can be tricky.
You’ll craft the NDA according to the scope of the idea and the specifics you need to keep confidential.
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When a firm, employee, freelancer, or any other person breaks a non-disclosure agreement, you may:
- Sue for damages
- Get a court order to stop further revelations
- Attempt to file civil and criminal complaints
When to Draft an NDA
Non-disclosure agreements are a part of the smooth working of large organizations, and should be considered when:
- You need to sell the business or buy a business
- You are about to license a product and need to preserve the value
- There are legitimate reasons to protect the information
- You have to demonstrate a product or service to potential partners and investors
- Your company value depends on retaining secrets and information assets
When drafting an NDA, bear in mind that there are a few exceptions to when a confidentiality agreement might not work. And having one is a stretch and a waste of time.
If the sensitive information has been subpoenaed with a party in the contract, there are chances the agreement may not hold up.
The scope of sensitive information should be specific and not too broad as public information can not be protected by a non-disclosure agreement.
In addition, any knowledge someone learns outside the company cannot be legitimately protected.
A party could reveal any sensitive information about your company if they had the information before signing the agreement.
Drafting the Agreement
All agreements should be written in electronic format and stored in a protected or PDF version to reduce the chances of it being edited.
Here is how to handle the most common sections. Keep them in mind when learning how to write a non-disclosure agreement.
Disclosing and receiving parties
All NDAs begin by declaring all of the parties in the agreement. The disclosing party is the owner of the information, while the receiving party is bound to keep it secret.
In bilateral disclosure agreements where confidential information has been shared both ways, both parties are the disclosing and receiving parties.
Once you have established the parties sharing the information, you should detail the scope of information that is being protected under the agreement.
You can include trade secrets such as special formulas, patent details, customer information, blueprints, and software development.
You can also include business information such as price structures, audits, mergers, and affiliate deals.
Creative endeavors such as film and new production can also be included in the non-disclosure agreement.
There is almost no limit to what can be kept secret as long as the disclosing party owns it.
List all types of information that should be protected by the NDA.
Exclusion from confidential information
Exclusions help define the kind of information that is not protected by an NDA.
Most exclusions are standard, but you can add other information depending on the details.
This section is made up of several clauses or a single clause that explains the different obligations of the receiver to the disclosing party.
Such as how they will handle, store, protect and delete information.
Non-solicitation and non-compete clauses prevent the receiver from competing with them in business.
Non-circumvention clauses prevent the subject from going directly to the other party’s suppliers and customers.
How long the contract is in effect
All contracts are affected by a given timeframe. The effective date is when the disclosure agreement begins, while the confidentiality period is how long the contract will be in effect.
At this point, the parties agree when the agreement ends.
Commonly, the termination can occur when the agreement expires, a contract is completed. Or after a specific time frame defined in the contract.
Work in these details when figuring out how to write a non-disclosure agreement.
Which local laws apply to the contract and which do not can dictate what is in a confidentiality agreement.
At times can invalidate an agreement if the provisions in the agreement are unlawful.
Any trial or hearing must take place in the specific locality that is stated in the confidentiality agreement.
All agreements come into effect after ratification by the parties or representatives; otherwise, they are null and void.
The signature section declares the signatory and, at times, their delegated representatives.
Different representatives can be authorized agents, directors, employees, or advisors who sign on behalf of a company.
Or any entity that may receive, share or protect the information in line with the NDA.
Depending on the type of business information being shared, you may add other sections as discussed in the introduction.
Severability clauses help maintain an NDA even when the court invalidates a section of it.
However, the amendment section allows for the amendment of the NDA to reflect business changes, the scope of the NDA, or even legal changes.
Following the steps in this article will assist you in keeping your sensitive information private, preserving key business relationships and value.
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*THIS ARTICLE IS FOR INFORMATIONAL PURPOSES FOR LEGAL ADVICE PLEASE CONSULT YOUR LAWYER