HR Glossary  >   Nondisclosure Agreement

Nondisclosure Agreement

What is Nondisclosure Agreement?

A Non-Disclosure Agreement or a Confidentiality Agreement is a legal contract where one party agrees to share confidential information about their business or products with another party, who promises not to tell anyone else for a certain time. NDA protects sensitive data and intellectual property by clearly stating what must be kept private and what can be shared publicly.

NDAs are often signed at the start of a business partnership. They can cover any information, like test results, system details, customer lists, or sales data. Breaking an NDA by leaking information is a contract violation.

Key parts of an NDA are:

  • Who is involved
  • What is considered confidential
  • How long the confidentiality lasts
  • What is not protected as confidential

Non-Disclosure Agreements are common in tech companies, especially when creating products together. In these cases, NDAs are usually mutual. NDAs are also helpful when a company is looking for investment. They let investors get the information they need without using it unfairly.

Besides an NDA, investors might be asked to sign a Non-Compete Agreement (NCA), which stops them from using the negotiation information for their own benefit. This is crucial when patents are pending but not yet granted.

An NDA is often made and signed by the potential buyer in an M&A deal, but sometimes the seller does it. Both parties usually review and change the Non-Disclosure Agreement to protect their interests. A well-made NDA prepares for a possible M&A deal and includes a clause that confidential information should only be used to consider a possible deal. This clause is important and rarely changes much in negotiations.

Companies also need NDAs when hiring outside help, like freelancers, who will see private information. This ensures the information stays safe.

Why is it important to have a Non-Disclosure Agreement?

A Non-Disclosure Agreement (NDA) is very important and helpful for the seller, who is sharing confidential details about their company. The seller takes a big risk by sharing this information because if others find out, it might not make customers and employees feel good.

For buyers, however, it's perfectly normal and okay to look for opportunities to buy other companies and grow.

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Clauses Included in a NDA

1. Parties in a confidentiality agreement, the potential buyer is called the "Receiving Party" and the seller is the "Disclosing Party," and sometimes there's a guarantor if the buyer has few assets.

2. Confidentiality in an NDA means all shared data, information, or notes, including those from meetings, are private and not public, and everything exchanged is treated as secret, not just things marked as confidential.

3. Confidentiality agreements don't include information that is already public, shared by the disclosing party before the agreement, received from others not bound to secrecy, or known by the receiving party before signing the NDA.

4. The NDA states its purpose, lists who the buyer can share information with for evaluating a possible deal, usually including their employees, advisors, lawyers, and investment bankers.

5. The party sharing information often wants all data destroyed if negotiations terminate, but the receiving party usually agrees that this doesn't apply to their internal records, electronic backups, or professional recordkeeping.

6. The NDA clearly states how long it lasts, usually one or two years, and sometimes it ends when the deal is completed, as buyers don't want an endless agreement.

7. Confidentiality agreements often restrict the receiving party and its related companies from trying to hire employees of the sharing party and sometimes also restrict the sharing party from contacting the receiving party's customers.

8. The agreement states that a state authority will oversee it and sets the language for court cases if there's a dispute about keeping information secret.

9. The receiving party ensures the language in the agreement makes it clear that the NDA is for exploring an opportunity and its business potential, not a commitment to make a deal.

10. It's usual and expected that if the receiving party breaks the confidentiality, the sharing party has a right to seek legal action like an injunction or specific remedies in court.

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