What is a Non-Disclosure Agreement, and Why is it Important to Have One in Business?

A non-disclosure agreement or NDA is a signed legal contract that helps businesses to protect their confidential and sensitive information. Typically, the individuals involved in an NDA agree not to disclose any trade secret and confidential business information to any third-party. Though this legally binding document is important for any business, it becomes especially crucial for start-ups and small businesses that often outsource lots of work to freelancers or contractors.

Parties involved in an NDA

In a non-disclosure agreement, there are two parties involved – the disclosing party and the receiving party. The former refers to the party that is sharing the confidential information while the latter stands for the party that is obtaining the information and maintaining its confidentiality.

Different types of NDAs

Before compiling any non-disclosure agreement, it is crucial to understand which type would serve your objective in the best possible way. NDAs can be of two types: non-mutual NDA and mutual NDA.

  • Non-mutual NDA: Also known as a unilateral NDA, here, only one party acts as the disclosing party. An example of a unilateral NDA could be when you are sharing your business idea to a potential investor and want to ensure your concepts will remain confidential. Another example could be employee contracts where your employees would be keeping your business’s sensitive information and trade secrets confidential.
  • Mutual NDA: In a bilateral or mutual NDA, both parties act as the disclosing party as well as the receiving party. It means both parties will be disclosing confidential information to the other party.  For example, if your business is partnering with another business to complete a particular project, you’ll need to compile a mutual NDA.

The importance of a non-disclosure agreement

Typically, a non-disclosure agreement serves the following crucial business aspects.

  • Stopping employees from misusing your business information: With the help of an NDA, you’ll be able to prevent your employees from using any business information for their personal gain. This will stop both your present and past employees from disclosing important business information to the public and you’ll be able to establish a breach of contract, if they do so.
  • Safeguarding trade secrets: For any business, trade secrets are essential elements with regard to overall profitability, operations, and maintaining a competitive advantage. If you are writing content or developing a new product, you may need to hire third-party service providers for help. You obviously don’t want that service provider to steal your prototype and sell it as their own creation. Unfortunately, you can’t expect them to keep your trade secrets private based only on their verbal communication. By creating a non-disclosure agreement and incorporating the information you strictly want to remain confidential, you can protect your trade secrets.
  • Separating confidential information from non-confidential information: When it comes to business information, it often becomes difficult to clearly understand what must be kept confidential and what shouldn’t. Since in a non-disclosure agreement, it is clearly defined what is confidential information and what isn’t, the involved parties understand their individual stand. So, they can’t claim the absence of knowledge or ignorance if there is any breach of contract.

Parting thoughts

As you know from the above, a non-disclosure agreement is a necessary legal step to protect your business’s confidential assets. Since this has become almost a standard process nowadays, you should compile an NDA whenever you think the sharing of confidential business information is involved. If the other party refuses to sign it, it’s important to rethink whether or not you want to continue doing business with them. This is because without a written NDA in place, there is no way to prevent the other party from disclosing this information.

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