What is a Non-Disclosure Agreement?
A Non-Disclosure Agreement (NDA) is a legally binding document that creates a confidential relationship between two or more parties. Typically, this legal framework protects a company's ideas and information from being distributed to any competitors or other parties.
A non-disclosure agreement is most commonly used when two parties consider working together. They are signed before you discuss any business practices or information that must be kept from competitors.
Note: You can create your very own non-disclosure agreement when you sign up for Bonsai for free and download our templates.
What to Include in the Non-Disclosure Agreement
In order to make sure that your non-disclosure agreement is effective, you must have all the essential elements. While a law firm certainly helps cover all of the bases, you can create a confidentiality agreement on your own by including the following items.
Involved Parties and Their Details
First and foremost, the non-disclosure agreement needs to identify the parties involved in the contract. It must also include their details, contact information, and the extent of their involvement.
In general, the contract should include both a disclosing party and a receiving party. As you might have guessed, the disclosing party is the person disclosing secrets. The receiving party is the person holding and maintaining confidential information for the sole and exclusive benefit of the other party. The benefit is often referred to as valuable consideration.
The format that includes one disclosing party and one receiving party is called a one-sided agreement. It is the more common type of NDA, but there are circumstances where additional parties may be involved.
If an affiliate company or another party will also be shown confidential information, you should list those parties and include their contact information as well. You can add as many parties to the agreement as necessary.
Description of Confidential Information
The next critical section of the agreement provides more detail regarding the confidential information disclosed. You must explain all of the confidential information clearly for each party to review. The part should be detailed enough to make sure that everyone understands the scope of the agreement.
What Kind of Details Should You Include?
To avoid confusion, you need to determine what type of information is deemed confidential. The information can include tangible materials, exclusive property, conversations in a chat online, and more.
For example, if you plan to discuss ideas over the phone, you would want writing indicating that such oral communication is confidential. In other cases, you may decide that written information is only confidential if it is labeled as such.
The disclosing party typically wants to make this definition as broad as possible. Otherwise, they would be susceptible to loopholes.
For the receiving party, this section is equally important. You must have a solid understanding of what confidential information you can and can’t use to avoid any consequences.
List of Confidential Information Exclusions
Just as it is important to understand what is classified as confidential information, you must include any exclusions. Nearly every non-disclosure agreement has them.
Exclusions arise when it would be considered unfair or too challenging for the receiving party to keep a piece of information confidential. Here are some examples of exclusions you may need to include:
- Information the recipient already knows
- Public knowledge not released by the recipient
- Information that the receiving party independently developed without the use of the disclosing parties confidential information
- Information disclosed by a third party with no duty of confidentiality
Note: There are legal exceptions that always apply to a non-disclosure agreement, even if they are not listed. Anytime a recipient has to share confidential information to a court or competent jurisdiction for legal reasons, they can do so. A court order would take priority over the NDA. However, the recipient must warn the disclosing party before the legal proceeding begins.
Duty of the Receiving Party
In a standard, one-sided non-disclosure agreement, you must spell out the receiving party’s obligations. This section details what the receiving party can and can’t do with the confidential information that they receive.
In addition to not sharing confidential information, the receiving party must also refrain from trying to get someone else to discover any secrets. They also can’t bypass the nondisclosure agreement by having another party leak the information. Therefore, it’s important to include all of the obligations and duties the receiving party has.
Expiration Date
You have several options when it comes to choosing the time period for the confidentiality agreement. Some non-disclosure agreements have a five-year expiration date. This is the most common length for companies in the United States; however, two or three-year agreements are also acceptable. If you are dealing with companies in European countries, you may consider increasing to ten years.
There are also cases where the non-disclosure agreement expires upon completion of the project. These are fairly common, especially among freelancers.
Still, some instances require the agreement to last indefinitely. These situations usually involve trade secrets that will never lose their value. No matter the case, you must clearly define the expiration date of the contract.
Termination Terms
Following the expiration date, you need to include the terms of termination in your non-disclosure agreement. This is the section that will spell out all of the things that need to be completed for the agreement to end. It’s especially important to include these details when the agreement ends following project completion.
If the disclosing party allows the receiving party to terminate the agreement early, you also need to provide those provisions. You shouldn’t assume that an agreement expiration lets the receiving party off the hook. There are several instances where the obligation to confidential information goes beyond the agreement's expiration date.
Signatures
Finally, all confidentiality agreements must conclude with signatures. All parties stated and involved in the non-disclosure agreement must sign the document to acknowledge that they agree to the terms. After all parties sign, business can finally start.
How to Write a Non Disclosure Agreement
Knowing what to include in a non-disclosure agreement (NDA) is only half the battle. You must also know how to write it if you don’t plan to use a law firm. We know that the idea of putting everything in written form is overwhelming, but we have a few tips to help you create non-disclosure agreements for your clients.
Find Out What’s Important to Disclosing Party
Before you can begin to draft any non-disclosure agreement (NDA) or related documents, you need to fully understand the other party and their needs. We recommend that you sit down and discuss the disclosing party’s request and the obligations of the receiving party.
It’s important that you meet with everyone involved in the process to ensure that all parties agree to the terms. You may need to speak with the other party’s lawyers to determine which sensitive information needs protection.
Determine Consequences
You also must carefully consider what the consequences will be for the public disclosure of your confidential information. It can be difficult to determine the commercial value of a trade secret, but you should do your best to calculate an amount for a potential lawsuit or fine.
If the receiving party’s duty is neglected, you may also wish to terminate the partnership or employment. If this is the case, you will need to provide written notice in the contract.
Keep in mind that there are illegal activities that can make an agreement invalid. Therefore, a receiving party can never be expected to keep criminal activities a secret just because they signed an NDA.
When Do You Need a Non-Disclosure Agreement?
A non-disclosure agreement is only necessary when you are working with exclusive property, trade secrets, or other confidential information critical to your business. If you’ve already shared any of the information through prior proposals or discussions, an NDA for this information would be deemed invalid and unnecessary.
If you’re having trouble deciding when or if you need a confidentiality agreement, you should consider the following situations.
To Protect Trade Secrets
A trade secret can vary greatly from one industry to another. A secret client list could be important to a marketing agency while a recipe could be critical to an ice cream manufacturer. A search algorithm or a unique manufacturing method are other examples.
Regardless of what your trade secret may be, you should always have someone sign an NDA before you disclose it. Doing so protects one of the most critical elements of your business from competitors.
When Sharing Sensitive Business Information
Whether you are dealing with marketing strategies or financial information, you should never share sensitive business information without an NDA. This could also include passwords to your website or cloud-based software.
It’s not uncommon to share this information when you are working with another company or agency. However, it's imperative to the security of your business that you keep all of this information protected.
Working with Potential Investors
Before two parties agree to work together, you may have to disclose some proprietary information. This is especially true when you are looking for a prospective buyer or investor.
They may require that you share key financial information or some of your trade secrets. If this is the case, you should make sure that sign the NDA beforehand.
Using Freelancers
If you will be working with any other freelancers, an NDA is a great way to add another layer of trust. More often than not, a freelancer will only be working with you for a short period of time. After the project is completed, you want to make sure that they don’t use any of your confidential information with other clients.
There may be some instances where a freelancer will ask to use your project in their portfolio. It’s ultimately up to you to decide whether or not you are comfortable with that. You could require prior written approval. It’s important that both parties agree on all of the terms of the NDA before you move forward with your business relationship.
Hiring New Employees
Unlike a contract worker, an employee typically will be around for several years. During that time, they will be trained in some of your critical business methods. They might have access to other trade secrets and confidential information. If this is the case, you should have them sign a non-disclosure agreement prior to their start date.
Employment NDA agreement violations are taken very seriously in the United States. If an employee knowingly or accidentally discloses any of their employer’s confidential information outlined in the agreement, they can face both criminal and civil repercussions.
As with most things, there are exceptions. You must allow for whistleblowing, and there are strict guidelines for what can and can’t be included in your NDA. You can always contact a local lawyer to see what your state and federal obligations are.
Creating a Non-Disclosure Agreement is Simple with Bonsai
At Bonsai, we understand how important it is to protect your confidential information with a solid NDA. That’s exactly why we offer free agreement templates that carefully restrict access to your most important trade secrets.
However, the fact that we offer the templates for free isn’t even the best part. When you choose to use a Bonsai NDA before you disclose confidential information, you can enjoy:
- Simple E-Signing: With Bonsai, you don’t have to wait several business days to get your agreements signed. Instead, both parties can quickly and conveniently sign the documents with our electronic signatures. From there, you can disclose confidential information immediately.
- Bulletproof Templates: Instead of hiring a lawyer every time you need to create a nondisclosure agreement, you can simply edit our thorough templates. We have taken the time to carefully create a sample agreement that protects your business, but it’s also easy to edit it to fit your specific needs.
- Faster Processes: When you use a sample non-disclosure agreement, you can move forward in your business transactions more quickly. Whether you are hiring a freelancer or working with another company, our easy-to-edit templates can be emailed for faster responses.
- Professional Notifications: You longer have to wonder if the other party received your NDA. Bonsai makes it easy to send out professional notifications to remind all parties to review and sign the agreement. In fact, you can schedule them out based on when the document was sent or opened.
Non-Disclosure Agreement FAQs
We know that we’ve covered a lot of information, so it’s perfectly normal to feel like you don’t have a complete understanding. In fact, we find that a lot of freelancers often want to know more about the non-disclosure agreement (NDA) process.
While we can’t provide you with specific legal advice, we can provide you with more information. Read on to see the answers to some of the most common questions we get.
When Does a Non-Disclosure Agreement Expire?
As we mentioned, non-disclosure agreements should establish an expiration period from the effective date. In most cases, the agreement is only valid for a few years because proprietary information becomes less valuable as industries evolve.
However, there are some cases where trade secrets must remain confidential. In these situations, the NDA never expires, so it’s important that you understand that before you sign nondisclosure restrictions.
What Happens if a Non-Disclosure Agreement is Broken?
If the receiving party intentionally or accidentally discloses confidential information, then the non-disclosure agreement (NDA) is broken. The party will then be held responsible based on the consequences listed in the contract. The disclosing party could take legal action in civil court, or the receiving party might be forced to pay financial damages.
In some more serious cases, employees could face criminal charges by the governing law for the unauthorized disclosure of trade secrets. We strongly recommend that you seek professional legal advice to get through the process, no matter the circumstances.
What’s the Difference Between a One-Sided NDA vs. Mutual NDA?
A one-sided NDA, sometimes referred to as a unilateral NDA, requires only one party to keep trade secrets for the other party. The disclosing party requests that the receiving party sign the NDA to ensure the safety of their confidential information. It is typically drawn up by the disclosing party’s representatives.
A mutual nondisclosure agreement protects confidential information for both parties involved. In this case, both businesses may be sharing trade secrets or proprietary information. Therefore, the document must show all parties agree to hold and maintain the information with great confidence.
With a mutual agreement, it’s not uncommon for one party to be disclosing more secrets or more valuable proprietary information. In these cases of inequity, it’s important that the agreement expresses the difference. However, you should make sure that all parties agree to the terms.
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