The information within your business is valuable. Whether it be proprietary processes, customer lists or your company financials– sensitive information is something you will want to protect. However, there are many situations where it will be unavoidable to share information – be it with partners, employees or service providers.
So what is a non-disclosure agreement and when is it used? A non-disclosure agreement (NDA) is a form of protection against any of this valuable information being used against you or passed on to any third parties. This article explains some of the most common circumstances for when to use an NDA.
What is a non-disclosure agreement?
A non-disclosure agreement is also sometimes referred to as a confidentiality clause. Its purpose is to prevent the disclosure of any sensitive information by requiring employees, potential investors or partners to sign a legally-binding agreement. The NDA may be a separate document or form part of an employment or partnership contract.
7 examples of when to use an NDA
1. For employees with access to valuable information
As part of the day-to-day running of a business, employees will often have access to the proprietary and confidential information about the company. This is necessary in order for them to do their jobs properly, however, it does leave valuable information exposed.
Employees do not stay forever and so an NDA protects this information from being shared with future employers, especially if they go on to work for a competitor. It also prevents employees from stealing your business’ ideas themselves and setting up a rival company.
2. Working with partner organisations or subcontractors
Whether it be an agency designing your company website, the manufacturers of your product or a subcontractor working for you, there will be times when external organisations will have access to a lot of information about your business. Make sure your NDA is amended to properly cover the situation and the party involved, as each case will be slightly different.
3. Negotiations with a potential investor or partner
In order to negotiate an investment or merger, it will be necessary to share a lot of sensitive information about the business with the other party. Potential investors or partners will want details about the financials of the business and details on the business operations, in order to make a decision about whether they wish to invest.
Since these negotiations are not yet finalised (and both you and the other party may be in discussions with other potential offers) always use an NDA to prevent a potential partner or investor from divulging this information with competitors.
4. Selling or licencing a product or service
Similarly when you are looking to sell a product or service, information about that product will need to be shared with a potential buyer. You do not want any figures or data being used as leverage in other deals that buyer may have with competing companies. In particular, an NDA can stop your company name or data being shared during other negotiations.
5. Pitching a start-up idea to a venture capitalist
If you are looking for investment into a new product or idea, an NDA protects your idea from being stolen and reproduced elsewhere. Unfortunately, however, some venture capitalists are reluctant to sign non-disclosures. Whilst this may put entrepreneurs off, walking away could mean missing out on receiving valuable investment or feedback.
To get around this, you could consider altering your pitch to protect your idea. Investors are interested in the company and people they are investing in, so focus your pitch on your strengths and expertise. You can also present details on the problem that you wish to resolve in the market, encouraging thoughts and ideas from the venture capitalist, without giving away your unique idea.
6. Seeking advice
There may be times you wish to seek professional advice for your business, whether from accountants, insurance brokers or business coaches. It is easy to assume a professional code of confidentiality, but these conversations are not automatically confidential. So it is always worth securing an NDA before discussing any sensitive information with a third party.
7. During the sale of a business
When selling your business, a potential buyer will need access to all information. Your entire business will be an open book as they will wish to have full details about all of the operations and financials of the business. It can be hard to know how serious a potential buyer is, so always have an NDA in place to safeguard the interests of the business against the sale falling through.
When not to use a non-disclosure agreement?
As well as knowing when to use an NDA, it is also worth noting when not to use one.
An NDA cannot be used to prevent whistleblowing or reporting a crime, such as sexual harassment at work.
In other situations an NDA may be unnecessary, since some areas of sensitive data sharing may already be covered by the data protection law (GDPR).
The contents of this article do not constitute legal advice and are provided for general information purposes only.
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