Small Business NDAs: Types, Templates and Examples
A non-disclosure agreement (NDA) helps a small business protect and maintain confidential sensitive business information. An NDA protects trade secrets, intellectual property, business plans, proprietary processes, strategies, formulas, designs, financial data and customer information.
- What is an NDA?
- Disclosing vs. Receiving Party
- Do you need an NDA?
- Requirements for an NDA
- Types of NDAs
- Unilateral NDA
- Bilateral NDA
- Multilateral NDA
- Remedies for Breach of NDA
What is an NDA?
An NDA, or non-disclosure agreement, is a legally binding contract that establishes a confidential relationship between two or more parties. A confidential relationship is one in which parties have an obligation not to share sensitive information. By signing an NDA parties agree that sensitive information that may be obtained through the confidential relationship will not be made available to any other person or entity not party to the agreement—including the general public.
An NDA provides both confidentiality and protection. It protects confidential information from disclosure to competitors and third parties. It also allows courts to provide relief when confidential information is disclosed. In the event that a recipient of confidential information breaches its obligations under a non-disclosure agreement, the disclosing party, or parties, may obtain specific performance, injunctive and equitable relief.
Non-disclosure agreements may alternatively be referred to as non-disclosure contracts, proprietary information agreements, confidentiality agreements, and confidentiality disclosure agreements.
Disclosing vs. Receiving Party
The party that discloses confidentional information in a non-disclosure agreement is known as the Disclosing Party while the party that receives confidential information is known as the Receiving Party. These terms are capitalized to indicate they should interpreted as defined with the non-disclosure agreement.
In a one-way or unilateral NDA there is one disclosing party and one receiving party. In a mutual or bilateral NDA both parties are the disclosing party and the recipient party. In a mutual NDA both parties will share confidential information with the other party.
In addition to the disclosing party and receiving party, there may be others parties to an NDA. For example, does the receiving party have employees, partners or investors that plan on reviewing the confidential information provided by the disclosing party? Will there be a third-party developer who will need access to the confidential information?
An NDA should clearly define the Disclosing Party, the Receiving Party, any third parties and the obligations of each under the agreement.
Do you need an NDA?
NDAs are common whenever confidential information is disclosed to prospective business partners, investors, creditors, employees, private contractors, consultants—or other stakeholders that require access to a company’s sensitive data or intellectual property. At some point most small businesses will share sensitive information that will require an NDA in order to move forward safely.
The following are specific situations where a small business may benefit from an NDA.
- Employees: Employees may have access to confidential information, including proprietary processes, trade secrets, recipes, strategies, client lists, vendor lists, emails lists and other sensitive data. An NDA will keep current and former employees from sharing this information with competitors, or using the information to launch a competing business. If an employee violates their NDA, a business has legal remedies to mitigate risk and seek damages.
- Product sale or licensing: When a business enters into the discovery stage of the sale or licensing of product or technology, confidential information, including trade secrets, financial data and other proprietary processes will be disclosed. An NDA ensures a potential licensee or purchaser cannot use information provided as leverage during negotiations to get a better deal elsewhere, or for their own gain if the deal falls through.
- Partners: Taking on a new partner or investor can be advantageous for a small business. However, during partnership negotiations sensitive information, including trade secrets, financial data and competitive strategies will be shared. An NDA ensures confidential information passed to a prospective partner is protected and the business has recourse if the information is leaked.
An NDA may be used when seeking funding to prevent prospective investors from sharing trade secrets and business plans with competitors. However, an investor may be reluctant to sign an NDA as it could prevent them from sourcing future deals with other companies. It is not uncommon for investors to refuse to sign NDAs.
- Clients and Service Providers: When you bring on a new client, or hire a service provider, you will share or become privy to sensitive information, such as email addresses, customer lists, financial data, business strategies, etc. An NDA will identify within the scope of the service being received or offered which information is considered confidential. An NDA will ensure confidential information is not shared accidentally and will decrease legal liability.
- Mergers and Acquisitions: An NDA is important to maintaining confidentiality during the M&A process. It identifies what information is to be delivered to the prospective buyer from the seller and how that information is to be used. It sets forth legal consequences in the event the NDA is breached by the buyer or its advisors. An NDA is also in the interest of a buyer who may wish to maintain confidential status of the acquistion of the company and protect their own trade secrets and sensitive data.
Requirements for an NDA
An NDA can be customized to meet the needs of the parties, but there are five essential elements every NDA should include.
- Parties to the Agreement. A valid non-disclosure agreement must identify all parties to the agreement. An NDA should identify the disclosing pary, receiving party, and any third parties covered in the agreement.
A business should clearly define itself in an NDA. A business with a complex legal structure should determine and identify which legal entity is the owner of information being disclosed.
- Definition of Confidential Information. An NDA should define what constitutes confidential information. It is the disclosing party’s responsibility to clearly identify what information must not be shared by the receiving party.
It can be challenging to define what is confidential information. A disclosing party may want to define confidential information as broadly as possible to ensure the receiving party doesn’t have any wiggle room to divulge or use its information. A receiving party wants to make sure confidential information is clearly identified so it knows with it can and can’t use.
Must confidential information be conveyed in writing? Oral information can be tricky to deal with, but it too can be considered confidential information. An NDA should specify how confidential information can be communicated.
- Exclusions of Confidentiality. There are exclusions to the definition of confidential information that should be identified in an NDA. Information that is available to the general public through no fault of the receiving party should be identified as non-confidential information. As should information obtained by the receiving party from a third party on a non-confidential basis.
Additional exclusions may include information obtained by the receiving party prior to disclosure by the disclosing party, information independently developed by the receiving party, information already known to the receiving party, as well as the compelled disclosure of confidential information by court order.
In certain situations, an NDA may simply define what information is not deemed confidential. All other information disclosed to the receiving party is considered confidential.
- Appropriate Uses of Information. Clearly define the intended use of confidential information. Identify for what purpose confidential information is being shared with the receiving party. Be specific.
In some situations an NDA may simply outline how information provided to the receiving party is to be used without defining the information as confidential. For example, the process for developing a fuel additive can be disclosed to designated third party contractors but cannot be shared with competitors or replicated by the receiving party.
- Time Period. How long should the term of an NDA last? How long should disclosed information remain confidential? A common term of an NDA is from one (1) to ten (10) years, while the obligation to keep certain sensitive information confidential by extend beyond the initial term of of the NDA. The term of an NDA may also exist in perpetuity, along with certain confidentiality obligations. The disclosing party should define when information is no longer considered confidential. In most cases the disclosing and receiving parties will negotiate a reasonable term for the NDA and time period for confidentiality obligations.
Additional provisions that may be included in an NDA:
- Return of Confidential Information. Should state the receiving party must return or destroy confidential information upon request by the disclosing party or once the NDA term ends.
- Governing Laws. Detail applicable state laws and jurisdiction that apply to the governance and enforcement of the non-disclosure agreement.
- Dispute Resolution. In the case of dispute, which party pays attorney fees? Indentity pre-chose dispute mechanisms (e.g binding arbitration)
- Breach of Agreement. Include acceptable remedies in case of the breach confidentiality on part of the receiving party.
Types of NDAs
If you need an NDA to protect sensitive business information, there are three types of non-disclosure agreements to consider: unilateral, bilateral, and multilateral. Each type is discussed in detail below.
|NDA Type||When to use?|
A unilateral NDA, also known as a one-way NDA, is used when only one party is disclosing confidential information. Confidential information covered by a unilateral NDA may include trade secrets, financial data, business plans, designs, and unpatented inventions. A unilateral NDA is the most common type of non-disclosure agreement used by a small business.
The following are the most common unilateral NDAs used by small businesses.
An Employee NDA is one of the most common and useful non-disclosure agreements a small business can and should use. The purpose of the employee non-disclosure agreement is to ensure current and former employees do not disclose or share confidential business information or sensitive data with any third party or competitor. Examples of protected information under an employee NDA include:
- Trade secrets
- Intellectual property
- Client/customer lists
- Proprietary business processes
- Business plans
- Operations plans
- Financial information
- Technical information
- Other confidential information
An employee NDA can’t protect information that is already in the public domain, has been ordered revealed by a court, can be discovered following a product release to the public, or was obtained by the employee prior to signing the agreement.
As with other binding contracts, an NDA is valid only if there is consideration. The consideration requirement is met if the employee NDA is executed as a term of the offer of employment. Hence, an employee NDA should be signed by an employee before the employee begins work or upon employment. When requiring that a current employee sign an NDA, additional consideration should be offered.
A contract NDA is another common non-disclosure agreement a small business can use to maintain confidential sensitive company information. As with an employee NDA, the contractor NDA identifies what information is considered confidential and restricts contractors from sharing sensitive business information that could reduce the competitiveness of a business.
A contractor NDA may also include conflict of interest and non-competition causes that protect a business by further limiting how a contractor can use information and knowledge they’ve gained while working with a business. It’s important to have a well drafted NDA when working with independent contractors. However, it’s also important to remember that a contractor may decide not to work with your business if they feel an NDA is too restrictive.
The contractor NDA is typically unilateral. On occassion, when a contractor also needs to protect their own information, a mutual NDA may be appropriate.
The confidentiality of intellectual property and unexecuted ideas and business plans is critical to the economic success of an invention. An inventor can use a unilateral NDA, such as a patent or invention non-disclosure agreement, to protect proprietary information and limit evaluators from using or disclosing the inventor’s work product(s), including development processes, designs, drawing, equations, formulas, patent appliciations, product data, intellect property and other confidential information.
When an inventor enlists of the services of a Designer or Prototyper to help get an invention off the ground, it is likely that improvements or modifications to the invention will be made during the design and prototype process. Such improvements or modifications can make the designer or prototyper a joint partner in the invention as a joint inventor or separate inventor of the improved or modified parts of the invention. To avoid a joint inventorship an inventor should require an NDA with an assignment clause that assigns all improvements or modifications to the inventor.
A small business in the processes of selling or licensing product technology or services can limit the buyer from sharing confidential information obtained during the sale via a unilateral NDA. A seller-buyer NDA restricts the buyer from disclosing confidential information relating to business operations, manufacturing/production processes, technology and intellectual property.
The unilateral seller-buyer NDA is also recommended in the event of a Merger and Acquistion or sale of a business. When selling a business, an NDA is not required but highly recommended. Most business brokers require prospective buyers to sign an NDA before the release of any important proprietary or confidential information. When drafted accordingly, an NDA can also prevent prospective buyers from hiring away the seller’s employees prior to the sale of the business or in the event the sale falls through.
An NDA is also useful for qualifying buyers. If a prospective buyer refuses to sign an NDA, they’re not likely a serious candidate for acquiring the business.
Finally, a unilateral NDA can keep the sale of your business “hush hush” if you don’t want the word of your impending business sale leaked to the public.
A bilateral NDA, also known as a mutual NDA or two-way NDA, is required when two parties disclose confidential information to one another. This form of NDA is common when two businesses are pursuing a joint venture, merger, acquisition or corporate takeover. If either party divulges the confidential information of the other party, they may be liable for damages.
Even though the bilateral NDA is intended to protect the flow of confidential information between two parties, sometimes a bilateral NDA is desired when only one party is disclosing confidential information. This strategy is designed to incentivize the disclosing party to draft an NDA with provisions that are fair and balanced knowing their is a possibility that the receiving party could become a disclosing party at a later date. This scenario is not all that uncommon.
A multilateral NDA, or multiparty NDA, involves three or more parties where at least one of the parties discloses confidential information to the other parties. The disclosed information will then be protected from further disclosure by each party.
The Multilateral NDA eliminates the need for multiple unilateral or bilateral NDAs between the disclosing and receiving parties. For example, a business disclosing confidential information to parties A,B, and C can enter into a single multilateral NDA with parties A,B, and C instead of entering into a separate agreement with each party. The multilateral NDA eliminates the need for three separate NDAs. Only one NDA is required.
In some situations, the advantage of signing a single multilateral NDA may be offset by the time and cost required to negotiate the complexities a multilateral agreement requiring unanimous consensus between all parties. A multilateral NDA is common for larger, complex business deals that include multiple parties.
Remedies for Breach of NDA
An NDA should include mutually agreeable remedies in the case of breach by the receiving pary. Remedies should be explicitely outlined. Even when remedies for breach of contract are outlined in the NDA, the disclosing party should preserve their right to seek equitable remedies. Remedies should not be biased. The idea here is avoid a breach in the first place and protect the disclosing party for losses in case of breach.
Remedies available to the disclosing party:
- Monetary damages
- Punitive damages
- Account of profit