When is a Non-Disclosure Agreement (NDA) Needed?

May 30, 2022
Photo by Cytonn Photography on Unsplash

Businesses have a lot to lose if particular technology, business, or operating information gets out to competing companies. Companies can lose revenue or be destroyed if important information gets into the wrong hands. A tool that can block the flow of leaked information is an NDA.

NDAs can be put in place to protect essential information from the hands of competitors, which can stem from different sources. However, legal problems can arise if an NDA is not constructed for proper enforcement if a leak occurs. And, NDAs are not in any way the same as non-compete agreements.   

Who May be Required to Sign an NDA?

Any entities that can potentially benefit your company can also be a source of destruction for it if they knowingly or unknowingly leak the wrong information to a competing business. Therefore, employees, potential investors, subcontractors, consultants, potential company buyers, and any other individual or company with a reason to have your business’s important technological or business operation information should be required to sign an NDA.

Employees

Whether your employees work in the sales, accounting, or manufacturing departments, they most likely have access to confidential and proprietary information. For example, suppose employees sign an NDA but disclose or use your confidential information. In that case, you could go after them for damages. 

Here are some examples of confidential and proprietary information that employees may have access to but you would not want them to disclose:

  • Client lists
  • Manufacturing processes
  • Technological operation of a product
  • Employee list and phone numbers
  • Supplier agreements and contracts

Potential Investors

If you are looking for investors to invest in your business, you will have to reveal sensitive information, such as the technical operation of your product or business finances. However, you lose nothing by having them sign an NDA and will be able to protect any information you share.

External Business Alliances

Any outside company that helps your business build structures, manufacture a product or provide a service would have access to confidential and proprietary information. For example, 

  • Subcontractors would know what products and processes you use to build structures.
  • Temporary employees would know how you manufacture your product and what parts are used to build it. 
  • Vendors may need to know the design of your product to supply a working part. 
  • Outside consultants may know what software and algorithms you use to provide a service.

These outside companies and individuals that help your business grow should be signing NDAs to ensure that they keep any of this vital information to themselves. 

Potential Company Buyers 

Suppose a buyer is interested in buying your company. In that case, they will have to know every detail of your product technology and business operations to ensure they are getting a good deal. 

However, if they decide to back out of the sale or open a competing business, this could pose a problem. Having them sign an NDA will allow you to pursue damages if they share or use your sensitive business information.

What Should be Included in an NDA?

An NDA can be tailor-made depending on whoever is signing it. For example, most employees will probably be signing a unilateral NDA, which means the employer will provide the information to which the employee will need to agree. 

On the other hand, a bilateral or multilateral NDA would probably be more fitting for external business alliances. This allows confidential information to be exchanged and shared with more than one party. 

However, whether it’s a unilateral, bilateral, or multilateral NDA, they all must include information that makes them legally binding:

  • The date the NDA becomes effective
  • Confidentiality rules for the recipient
  • Reason for disclosure
  • Possible remedies if there is an attempt at willful circumvention of the agreement by the recipient
  • The date or circumstances that end the NDA

Don’t Confuse NDAs with Non-Compete Agreements

A company can choose to combine NDAs and non-compete agreements, but they are two distinct types of agreement. NDAs protect confidential information, while non-compete agreements can specify that an employee cannot open a competing business or work for a competing business in a specific location and for a specific period of time after their employment is terminated. Non-compete agreements are based on geographic specifications and duration constraints

For example, an NDA cannot restrict an employee from talking to potential employers about their job. According to the California Superior Court, this clause would be part of a non-compete clause, not an NDA.

Conclusion

You worked hard to build your business. However, having your confidential and proprietary business information get into the wrong hands can dismantle everything you have built.

Knowing when an NDA is needed and who you may want to sign an NDA will help you protect confidential technology and business operation information from being leaked to competing businesses.

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